ECB injects $501 bln to banks in short-term funding

The European Central Bank injected an unprecedented $500 billion into the banking system at a below-market rate, in a cash injection to counter the impact of the global credit crunch. The aim is to cut the cost of lending between retail and commercial banks, which has jumped in the past few weeks.

The rate at which banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, after climbing 83 basis points in the past two weeks, the European Banking Federation said.

All banks with enough collateral, and which submitted bids of at least 4.21%, were eligible to receive funds from the ECB. The idea is to try and bring down interbank rates closer to the ECB’s target interest rate of 4%.

The decline is the first sign attempts by policy makers to revive interbank lending are succeeding. Central banks, led by the Federal Reserve, are seeking to restore confidence to money markets after the collapse of the U.S. subprime-mortgage market. The ECB loaned a greater-than-anticipated 348.6 billion euros for two weeks at 4.21 percent.

The ECB said bids at Tuesday’s auction were received from 390 banks and ranged from 4 percent to 4.45 percent. The central bank first offered extra cash on Aug. 9, when it lent 95 billion euros in emergency funding, a record at the time. Banks borrowed 2.435 billion euros at 5 percent Monday, the most since Sept. 26, the ECB also said today.

The three-month euro-borrowing rate fell 7 basis points to 4.88 percent, down from near a seven-year high, the EBF said.