Fed, ECB Respond to Credit Crunch

Two days after taking a tougher-than-expected stance on monetary policy, the Federal Reserve injected $12 billion of reserves into the banking system Thursday morning.

Meanwhile, the European Central Bank -- which has been in an overt tightening mode for several months -- has allocated nearly 95 billion euros, or about $130 billion, at a fixed rate of 4% in a "fine-tuning operation" aimed to assure orderly condition in the euro money markets.

The central banks' actions come after the investment unit of BNP Paribas, France's largest bank, temporarily suspended three of its funds due to a lack of liquidity in the market. In addition, Dutch investment bank NIBC Holding said it lost at least 137 million euros on subprime investments, Bloomberg reports.

BNP Paribas said it stopped withdrawals from funds with over 2 billion euros in assets because it couldn't accurately asses the value of its mortgage-backed securities, the latest evidence that the crises in the sector is spreading, belying the confidence shown in financial markets on Wednesday.

European bourses tumbled in response. Germany's DAX and London's FTSE were each recently down more than 2% while futures were pointing to steep early losses for U.S. stock proxies.

The ECB's action is the largest such operation in the banks' history, eclipsing the 69.3 billion euros it provided the day after the Sept. 11, 2001, terror attacks in New York. The Fed's action is not unusual, as such open-market operations tend to occur regularly on Thursdays, but the $12 billion is a bit larger than normal, according to Anthony Crescenzi, chief fixed-income strategist at Miller Tabak.