Banks scramble for fresh cash offers

European central banks and the Bank of England stepped up the efforts they initiated on Monday as banks scrambled for cash following Lehman Brothers' demise, the unexpected sale of Merrill Lynch to Bank of America, increased uncertainty over large insurance companies and other commercial lenders around the world.

In particular, many commercial banks will be short of cash because they have exposures to Lehman Brothers that are now tied up in bankruptcy proceedings. Analysts say that perilous position of American Insurance Group, to which banks have massive exposures, has sent lenders into a tailspin in search of cash.

The European Central Bank (ECB) reported a sharp rise in eurozone banks' demand for liquidity and pumped €70 billion ($99 billion) of emergency funds into the overnight market - significantly higher than its inject of €40 billion the day before.

The Bank of England also followed Monday's injection of £5 billion of cash until Thursday, with an additional £20 billion ($35 billion) on Tuesday.

At the same time, the Federal Reserve Bank of New York made an announcement on Tuesday, saying: "Shortly, the Desk will arrange a large overnight repo. The Desk stands ready to arrange further operations later in the day, as needed." The Fed's rate-setting Federal Open Markets Committee meets on Tuesday in Washington D.C.

The move follows signs of extreme stress in markets for unsecured bank funding. On Tuesday the overnight sterling Libor rate jumped to a seven-year high of 6.79% as banks hoarded cash. The short term Overnight Indexed Swaps (OIS) market, more closely watched by the Bank, was also extremely volatile with short-term interest rates trading well above the Bank's 5% policy rate.

The ECB reported that bids for its new overnight money auctions, launched in the wake of the Lehman Brothers collapse, exceeded €100 billion. Ultimately, the ECB allocated €70 billion at an average interest rate of 4.4%. The central bank's policy rate is currently 4.25%.

The ECB also recorded record-high bids for money offered through its standard regular offer of seven-day funding. In total, 533 banks bid for a total of €328.7 billion, while the central bank allotted €150 billion.