ECB lends banks $502 billion, easing cash drought

The European Central Bank loaned 348.6 billion euros ($501.5 billion) for two weeks to banks to bring down the cost of money at year-end. The ECB said 390 banks bid for the two-week loans at a marginal rate of 4.21%. Bids ranged from 4% to 4.45%. The reluctance to lend money after the collapse of the U.S. subprime market pushed interbank euro rates for two weeks to the highest level at least six years earlier this week. The rate banks charge each other for two-week euros fell to 4.45% from 4.94%, the European Banking Federation said today [18 Dec 2007].

Borrowing costs jumped in August as banks, including Bear Stearns Cos. and Merrill Lynch & Co., began to reveal losses on securities linked to U.S. mortgages aimed at people with poor credit histories. Losses from U.S. subprime mortgage foreclosures will probably reach $300 billion, the Organization for Economic Cooperation and Development [OECD] predicted on Nov. 22. The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a "substantial recession" in the U.S., Goldman Sachs forecast on Nov. 16. The ECB first offered extra cash on Aug. 9, when it lent an unprecedented 95 billion euros in emergency funding to banks.

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