Credit Watch: Fed to Pump More Funds Into Markets

The U.S. Federal Reserve and European Central Bank announced plans to pump more funds into troubled money markets to give banks enough cash to get them through a year-end squeeze.

Meanwhile, Britain's main casualty in the global credit crisis, Northern Rock, found a potential rescuer while Europe's biggest bank, HSBC, said it would rescue two of its own complex investment vehicles.

Goldman Sachs downgraded HSBC shares

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[HBC  Loading...      ()   ] to "sell," saying HSBC would

HSBC said it would take its two structured investment vehicles onto its balance sheet to avoid a forced sale of their underlying assets.

probably need to set aside a further $12 billion against losses on U.S. mortgage debt, in addition to providing up to $35 billion in backing for the investment vehicles.

Persistent concerns about banks' year-end funding drove up interbank rates and the Fed said it would put enough funds into the money markets into the new year to resist upward pressures on its benchmark interest rate, the fed funds rate.

The European Central Bank also confirmed on Monday it would continue to offer banks extra funds at its weekly tenders at least until early next year.

Northern Rock said a consortium led by Richard Branson's Virgin Group was its preferred bidder and planned swift repayment of 11 billion pounds ($22.6 billion) of emergency lending from the Bank of England.

The UK central bank is estimated to have lent Northern Rock 25 billion pounds since mid-September after global fears of exposure to high-risk debt dried up the money markets that had helped fund its mortgages.

The global squeeze that ended a long-running credit boom in August has slashed the earnings of major banks around the world and investors fear more losses will emerge as banks unwind the complex investments they made based on repackaged assets of varying creditworthiness.

HSBC Holdings said it would take its two structured investment vehicles (SIVs), Cullinan and Asscher, onto its balance sheet to avoid a forced sale of their underlying assets -- most of them still highly rated.

HSBC said it hoped the move would restore some confidence to the sector whose access to short-term funding has been severely limited since defaults on U.S. mortgage debt made investors shun asset-backed commercial paper.