US banks are in close discussion with financial regulators to resolve a liquidity crisis in the market for commercial paper, said sources close to the situation.
The scheme is intended to help bank-sponsored investment vehicles known as "conduits" or "structured investment vehicles" (SIVs) that obtain their funding via the commercial paper markets, but have struggled in recent weeks as a result of the credit squeeze.
The banks are planning to band together to create a single "super conduit" that would pool the ailing investment vehicles, dispersing the risk among all the banks. This could then help ease the liquidity squeeze in the short-term debt markets by easing fears that any such vehicle could implode, hitting the rest of the market.
Citigroup is one leader of the proposal. The bank has seven such affiliated vehicles with nearly $100bn in assets.
SIVs invest in long-term, and often thinly traded assets ranging from credit card debt and residential mortgages. Demand for such asset-backed commercial paper dried up during the credit squeeze as investors recoiled from complex structured products and subprime mortgage-related assets.
As such, the market for asset-backed commercial paper has shrunk by more than 20 per cent over the past two months, according to the Federal Reserve.
This forced many SIVs to tap their sponsoring banks for cash to fund their liquidity shortfall, and has contributed to elevated interbank lending rates based on concerns over how the situation could weigh on banks' balance sheets and restrict lending in other markets.
The three-month dollar London interbank offered rate was set at 5.22 per cent on Friday.
credited by: ft.com
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment