Liquidity and funding management

At the start of the second quarter, market conditions in the banking and broader financial sector remained tense. However, as the quarter progressed, signs of relative improvement emerged: credit spreads of financial institutions continued to retreat from the high levels of the prior quarter; and public term-debt markets became broadly accessible to banks for unsecured bond issuances for the first time since late third quarter 2008, across various currencies and a range of tenors. The banking sector had been dominated by, and for lengthy periods restricted to, government-guaranteed bond issuances throughout fourth quarter 2008 and into much of first quarter 2009. The general tone of the market for money market paper issuances likewise improved noticeably during the second quarter, with flows no longer being effectively limited to very short tenors, signaling investors' increasing appetite for banks' term debt.

Developments and activities by governments and central banks during the second quarter were also indicative of the relative improvement in financial market conditions. For ­instance, in early May, the US Federal Reserve Board announced the results of its Supervisory Capital Assessment Program, allowing ten major US financial groups to repay to the US Treasury some of the previous capital injections they had received, and marking a potential turning point in the economic crisis. At the same time, declines in borrowing were registered in some of the Federal Reserve Bank's major extraordinary liquidity facilities that had been introduced during the crisis, as in many cases market sources of funding became less expensive than funding obtained through these facilities.