Financial & Economic Crisis

Global Responses to Financial Crisis 2008

 

As a result of the crisis, China cut its interest rate for the first time since 2002. Indonesia reduced its overnight repo rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to 10.25 percent. The Reserve Bank of Australia injected nearly $1.5 billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $1.32 billion, through a refinance operation, its biggest in at least a month.

In Taiwan, the central bank said it would cut its required reserve ratios for the first time in eight years. The central bank added $3.59 billion into the foreign-currency interbank market on September 16, 2008. Bank of Japan pumped $29.3 billion into the financial system on September 17, 2008 and the Reserve Bank of Australia added $3.45 billion the same day. The European Central Bank injected $99.8 billion in a one-day money-market auction. The Bank of England pumped in $36 billion. Altogether, central banks throughout the world added more than $200 billion from the beginning of the week to September 17.

On September 29, 2008 the Belgian, Luxembourg and Dutch authorities partially nationalized Fortis. The German government bailed out Hypo Real Estate.

U.S. responses

On September 19, 2008, the Federal Reserve, Treasury, and Securities and Exchange Commission took several steps to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced a new $50 billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program. Part of the announcements included temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board. The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.

During the week ending September 19, 2008, money market mutual funds had begun to experience significant withdrawals of funds by investors. This created a significant risk because money market funds are integral to the ongoing financing of corporations of all types. Individual investors lend money to money market funds, which then provide the funds to corporations in exchange for corporate short-term securities called asset-backed commercial paper (ABCP). However, a potential bank run had begun on certain money market funds. If this situation had worsened, the ability of major corporations to secure needed short-term financing through ABCP issuance would have been significantly affected. To assist with liquidity throughout the system, the Treasury and Federal Reserve Bank announced that banks could obtain funds via the Federal Reserve's Discount Window using ABCP as collateral.

Federal Reserve actions to lower interest rates and stimulate the economy

The Secretary of the United States Treasury, Henry Paulson and President George W. Bush proposed legislation for the government to purchase up to US$700 billion of "troubled mortgage-related assets" from financial firms in hopes of improving confidence in the mortgage-backed securities markets and the participating financial firms. Discussion, hearings and meetings among legislative leaders and the administration later made clear that the proposal would undergo significant change before it could be approved by Congress. On October 1, a revised compromise version was approved by the Senate with a 74-25 vote, the sole Senator not to vote was cancer-stricken Ted Kennedy of Massachusetts. The bill, HR1424 was passed by the House on October 3, 2008 and signed into law.

In an effort to increase available funds for commercial banks and lower the fed funds rate, on September 29 the U.S. Federal Reserve announced plans to double its Term Auction Facility to $300 billion. Because there appeared to be a shortage of U.S. dollars in Europe at that time, the Federal Reserve also announced it would increase its swap facilities with foreign central banks from $290 billion to $620 billion.

UK Responses

On October 8, 2008 the British Government announced a bank rescue package of around £500 billion. The plan comprised three parts: Firstly £200 billion would be made available to the banks in the Bank of England's Special Liquidity scheme. Secondly the Government would increase the banks' market capitalisation, through the Bank Recapitalisation Fund, with an initial £25 billion and another £25 billion to be provided if needed. Thirdly the Government would temporarily underwrite any eligible lending between British banks up to around £250 billion.

 

 
This article uses material from the Wikipedia article "Global Financial Crisis of 2008"

 

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