Capital flight: Banks clamouring for liquidity

US fed has more work to finish after the recent investment bank meltdown. A lot has already been said and written about what should have been done and what not, but as humans, financial institutions are prone to mistakes. So, the big daddy bails out AIG and other blue-chips banks going for a song is a ritual performed every 15-20 years or so. Though the price is a little too much this time, but that’s ok given the regulator’s high level of tolerance.

Anyway, the latest to add in the list is the amount of liquidity required in the system. After the mayhem, banks are being inundated with lines of credit requests. These are the agreements the banks entered into when the grass was green and the meadows were lush. Again, no wonder the banks went on a spree and committed US$1.4 trillion in such arrangements. These are the short term loans for working capital, but the sheer size of the amount required is enough to make your eyes go round.

The rush for short term credit is another drag on the balance sheets of the banks, which are already stretched after the recent crisis after swallowing US$521bn of write downs and losses. Citigroup is leading the pack with US$471bn in such agreements, while Bank of America and JPMorgan each have short term line of credit commitments amounting to US$388bn and US$255bn respectively.

And the companies are flocking to improve their liquidity positions. General Motors plans to make use of the remaining US$3.5bn revolving line of credit to cover its restructuring costs. International Lease Finance Corporation has also tapped Citigroup and other banks for its US$2.5bn syndicated credit loan.