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Jean-Claude
Trichet
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At the end of last week the European Central Bank (ECB) announced that it would be injecting more cash into the money markets to avoid a further drying up of liquidity. The ECB also joined the crowd of those crying for improvements in the output of the rating agencies.
On Friday night, according to the Financial Times, the bank said it would inject an unspecified amount of extra liquidity next week, and would continue doing so at least until the end of the year. This is in the fear that the lack of available funds for players in the fixed mortgage markets could dry up and so create further Northern Rock situations.
In a speech on Friday, Jean-Claude Trichet, President of the ECB, called for greater detail in both the content of the rating information and the disclosure of the processes taken in reaching those ratings. Addressing the 17th European Banking Congress in Frankfurt, Trichet said “…there is probably scope to improve the information content of ratings and to make the monitoring process more transparent. It also needs to be investigated further to what extent conflicts of interest may have arisen for rating agencies in their credit risk assessment of structured credit instruments”.
On both sides of the Atlantic there have been collaborative steps by banks to protect themselves against the liquidity crisis - a sure sign that things are not getting better! Henry Paulson, US Treasury Secretary, is leading an initiative called M-LEC (Master Liquidity Enhancement Conduit) whose purpose intended to avoid defaults by mortgage-backed loan driven funds and provide back-up financing by buying their higher-rated long-term assets using short-term commercial paper. So far Bank of America, Citi and JPM Chase have already signed up. In Europe, five French banks - BNP Paribas, SocGen, Calyon, Natixis and HSBC France - are also creating a fund to buy asset-backed securities from struggling funds with the objective of improving liquidity.
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