Federal Reserve bails out banks

28 November 2007

The Federal Reserve has announced that it will offer banks loans for the first time in two years.

In an attempt to prevent funding crises at the end of the year, the reserve has said it will inject $8 billion into the banking industry today in the form of repurchases.

"The Fed is pulling out all stops to try to alleviate funding pressures in the money and financing markets as the markets lurch into year-end,'' Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, said in a statement.

The average US overnight lending rate between banks topped the reserve's target for the majority of last week, as lenders withdrew their offers after growing sub-prime mortgage losses, prompting the move.

"Unusual pressures in funding markets persisted,'' the Federal Reserve confirmed and the central bank's chairman Ben Bernanke will comment on market developments as the new funding is made available.

New York funds will "provide sufficient reserves to resist upward pressures'' at the end of this year.

This news comes after the European Central Bank announced last week that it would provide extra funding to banks in order to deal with volatility in the markets.

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