World’s biggest central banks act to shore up global financial system

FEARS of an international banking crisis heightened yesterday as the world’s biggest central banks announced a programme of co-ordinated action designed to support the global financial system, a move that sent global stock markets soaring, writes David Maddox.

The unprecedented announcement from the European Central Bank, US Federal Reserve as well as the Bank of England and central banks in Canada, Japan and Switzerland came as UK retail banks saw their credit rating downgraded as markets began to panic about their viability.

And the concerns were further heightened by reports that the Financial Services Authority (FSA) had warned banks to prepare for the eurozone to break up.

The fate of the eurozone has been the biggest destabilising factor for the banking industry and there are fears that if countries like Greece, Italy, Spain and Portugal are cut loose, they will default leaving banks in Britain and Europe exposed to bad debts.

Despite this, global markets rose. On Wall Street, the Dow closed up nearly 500 points, or 4.2 per cent, its biggest jump since March 2009. Germany’s Dax index closed 5 per cent higher, while France’s Cac 40 jumped 4.2 per cent and the UK’s FTSE 100 rose by 3 per cent. Banks were particular beneficiaries. In the UK, Barclays surged more than 6 per cent and shares in Lloyds and Royal Bank of Scotland ended more than 7 per cent higher.

The move by central banks is seen as an attempt to defend the financial services sector against any countries defaulting as concerns mount that problems in the eurozone could lead to another crisis worse than the one in 2008 which battered Northern Rock, HBOS and RBS.

US Treasury secretary Timothy Geithner welcomed the move, which he hoped would take pressure off the European financial system.

Mr Geithner said: “We welcome and support the actions taken by central banks around the world today to help ease pressure on the European financial system and help foster the global economic recovery.”

Responding to reports that the FSA had contacted banks asking them to ensure they had contingency plans in place for the case of a break-up of the eurozone, the spokesman said: “I would expect the FSA to be talking to the banks constantly.

“As the Chancellor said, we have been stepping up our contingency planning.

“This is about having sensible contingency plans in place because clearly there is a very serious situation in the financial markets at the present time.

“We are experiencing a credit crunch and that central bank action is about trying to mitigate the effects of that credit crunch.”

Analysts said the central banks’ decision would help to relieve some of this strain within the global financial system.

“This shows that central banks across the world continue to co-operate and that the ECB, and its partners, are very aware of the funding stress that European banks are under at the moment,” said Christian Schulz at Berenberg Bank.

“This decreases the cost of funding in US dollars or other currencies so it’s small, but it’s a boost to banks’ profitability and gives them a better chance to shore up their capital ratios.”

BUSINESS, PULL-OUT