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 to "sell," saying HSBC would
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 bidderand 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 sheetto 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.
European Central Bank: 'Re-emerging Tensions'
The French bank hardest hit by the market crisis, investment bank Natixis, on Sunday put the cost at 407 million euros ($602.6 million) for its third-quarter results.
Its parent companies, unlisted Banque Populaire and Caisse d'Epargne, bailed out the subsidiary on Nov. 22 by taking over the CIFG bond insurance unit where they plan a capital injection of around $1.5 billion.
The ECB on Monday repeated a statement made late on Friday, saying it "has noted re-emerging tensions in the euro money market" and promising to keep adding extra liquidity in its market tenders.
Banks have taken repeated hits on their balance sheets in recent weeks and have started hoarding cash again, fearing renewed funding problems over the holiday period.
These worries drove London interbank offered rates for two-month euro deposits to new six and a half-year highs on Monday and three-month euro rates rose for the ninth straight session.
Hedge Funds Oppose Northern Rock Deal
Meanwhile a deal for Northern Rock could face problems from shareholders. Its top two investors -- hedge funds RAB Capital and SRM Global -- have urged advisers to scrap the sale process to prevent any firesale.
But Virgin's proposal may calm a mounting political dispute about the use of taxpayer funds to help Northern Rock and also offers some potential upside to shareholders. Analysts said both factors are likely to have sealed its success.
The authorities had to step in to support Northern Rock to halt the first run on a major British lender since the 19th century.