Central banks are assuming the role of clearing houses for interbank business. Instead of bank A borrowing directly from bank B, A now accesses generous official credit facilities while B places its excess cash on deposit with the central bank. The new role should ease pressure on the banking system but may prove difficult to reverse.

The latest Fed balance sheet figures illustrate the change. Reflecting various new lending initiatives, total Fed credit rose by $503 billion, or 51%, in the fortnight to Wednesday. Meanwhile, banks with excess cash placed an additional $90 billion on deposit at the Fed and are likely to have taken up part of the recent increase in Treasury bill issuance, with the Treasury onlending the proceeds to the central bank.

The Fed’s increased willingness to extend credit amounts to an implicit guarantee on interbank liabilities. Any bank unable to refinance its wholesale borrowing can bridge the gap using official facilities. In theory, the Fed is protected by collateral requirements but these are now loose and the value of the security in any fire sale is highly uncertain.

The combination of the Fed’s expanded intermediation role with an increase in deposit insurance from $100,000 per account holder to $250,000 implies the US authorities now stand behind the bulk of the banking system’s liabilities. The Irish government has been criticised for introducing a blanket guarantee of its banks’ borrowings but the effect of recent US actions is similar.

Having resisted using its own balance sheet, the Bank of England is finally emulating Fed-style intervention. Its total assets rose by £69 billion, or 58%, in the fortnight to Wednesday. The Bank today announced a further loosening of its collateral requirements for its weekly auctions of three-month funds to include asset-backed securities based on consumer and corporate loans and asset-based commercial paper.