FRANKFURT -- European central banks will pump extra cash into strained money markets Monday morning, after a weekend of brinksmanship that saw Wall Street titans totter and shook the U.S. financial system to its core.
With interest rates on the overnight loans that euro-zone banks make to one another climbing, the ECB said early Monday it will inject extra overnight funds into markets. The ECB "stands ready to contribute to orderly market conditions," the central bank said in a statement. Euro-zone banks will submit bids for an undetermined amount of central bank funds later this morning.
The Bank of England said it will offer £5 billion ($9.87 billion) in extra three-day funds. The Swiss central bank said it would take similar steps if necessary.
European governments also sought to reassure jittery markets Monday morning. French Finance Minister Christine Lagarde, speaking on French radio Europe 1, asked French and European banks not to panic, saying "mechanisms" to prevent any destabilizing of European financial markets have been put in place. She didn't elaborate.
Germany's Finance Ministry, banking regulator BaFin and the German central bank also said they were in close contact with their international partners and German banks.
On Sunday, with U.S. authorities reluctant to step in with support to save the U.S.'s fourth-largest investment bank, Lehman Brothers Holdings Inc. said it would file for Chapter 11 bankruptcy. Meanwhile, Merrill Lynch & Co., a 94-year-old Wall Street institution, sold itself to Bank of America Corp. for US$50 billion and insurer American International Group Inc. pulled together a survival plan that includes selling off its most valuable assets, raising more capital and going to the U.S. Federal Reserve for help. (See related article.)
German authorities Monday morning said German banks' exposure to Lehman is manageable.
The Fed Sunday also launched a series of emergency lending measures designed to shepherd markets through one of the most perilous trading environments in decades. In another landmark step in its efforts to address the deepening credit crisis, the Fed said it will expand its lending facilities, taking a wider array of securities -- including equities -- as collateral for its loans. (See related article.)
The market gyrations highlight the delicate balance central bankers must find between preserving financial stability and propping up dysfunctional markets. Earlier Monday, the Reserve Bank of Australia injected an extra 2.1 billion Australian dollars (US$1.7 billion) into its money markets, well above the A$828 million the central bank estimated banks needed for routine business.
Central banks manage economic growth and prices by setting a target for the rate on overnight loans between big banks. They then use open-market operations to increase or decrease the supply of funds to keep the market rate near the target. When the rate moves far above the bank's target rate, it signals that banks are becoming increasingly reluctant to lend to one another.
Overnight euro-zone interest rates on Monday hovered between 4.43-4.48%, well above the ECB's short-term rate target of 4.25% and opening rates around 4.30%. ECB money-market staffers prefer to keep the difference between the interbank lending rate and their own short-term target to a few hundredths of a percentage point.
Since overnight rates shot up nearly a full percentage point above the ECB's short-term target on Aug. 9 last year, prompting the central bank to flood markets with nearly €95 billion ($135 billion) in overnight cash, central banks worldwide have continued pumping extra short-term funds into markets to spur banks to lend to one another. While the overnight interbank lending market calmed after the initial outbreak of the turmoil last year, banks anxious to have cash on hand for their own unforeseen funding needs and wary of the creditworthiness of other banks have been wary of lending to one another for longer periods of time. Three-month interbank lending rates Monday morning were relatively steady around 4.92%, a level that still remains high by historical standards.
"Sunday's events mark a turning point in the crisis, but the fundamental premise is the same as it's been since last year," said Michael Schubert, an economist with Commerzbank in Frankfurt. "Banks still do not know how much liquidity they need themselves and there's even more uncertainty regarding other banks."
--Monica Houston-Waesch, Terence Roth and Geraldine Amiel contributed to this article.
Write to Joellen Perry at joellen.perry@wsj.com
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