Europe moves to refinance banks

The European Central Bank and Bank of England flooded money markets with more than $500 billion in funds Tuesday, and the British central bank chief warned of a possible “self-reinforcing” downward spiral in credit.

The Frankfurt-based European Central Bank, which oversees monetary policy among the 13 countries that use the euro, scrapped the usual upper limit on how much it lends to banks in Tuesday’s refinancing operation. As a result, the central bank made $500 billion in two-week loans to commercial banks at an annualized interest rate of 4.21%.

The Bank of England made about $20 billion of three-month loans to British banks as part of a coordinated action with other central banks to ease credit pressures by providing cash at favorable rates.

Most experts said the joint actions were unlikely on their own to solve the global credit crisis set off by the U.S. sub-prime mortgage meltdown, and Bank of England Gov. Mervyn King acknowledged the limits of the government infusions of cash.

“Large banks are now awash with cash. The issue is not whether they have enough cash; it is whether they are inclined to lend,” King told a parliamentary committee in London.

Banks have been afraid to lend each other money for short-term needs amid a scarcity of credit, driving up rates. The central banks are sharply stepping up their normal role as providers of liquidity, a job that usually gets far less attention than their interest-rate moves.

“In the last four weeks, banks themselves have been worried that the impact of their reluctance to lend will lead to a sharper slowdown in the United States,” King said.

“That concern is a serious one because it does hold out the prospect that there will be a self-reinforcing downturn in credit and activity,” the Bank of England chief added.

In its operation Tuesday, the European Central Bank said, 390 banks and financial institutions submitted bids to borrow a total of $543 billion at rates of 4% to 4.45%.

On Monday, the central bank auctioned $20 billion of 28-day funds as part of the joint plan by the world’s monetary authorities.

The U.S. Federal Reserve auctioned a similar amount Monday, and the Swiss National Bank offered as much as $4 billion.

Results of those auctions are due today.

“It’s very disconcerting that we’re getting central bank interventions for a problem that many were hoping would be a self-contained one,” said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. in Florham Park, N.J.