G7 central banks to boost dollar funding
The US Federal Reserve and five other major central banks launched a coordinated effort on Sunday to boost the flow of US dollars in the global financial system via swap line arrangements, the regulators announced in a joint statement. Apart from the Fed, the action was joined by the Bank of Canada, Bank of England, Bank of Japan, the European Central Bank, and Swiss National Bank.
The move will “enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements” by increasing the frequency of seven-day maturity operations from weekly to daily. Swap lines are agreements between two central banks to exchange currencies, usually with the aim of allowing one of the central banks to obtain liquidity in a foreign currency that can then be forwarded to commercial banks in that country that need the funding.
The operations will begin on Monday and are slated to continue at least through the end of April. The measure is aimed at “serv[ing] as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses,” the monetary authorities stated.
The announcement came after UBS, Switzerland’s largest lender, agreed to buy embattled Credit Suisse in a deal brokered by the Swiss government. The emergency takeover became necessary after Credit Suisse, one of the 30 globally systemically important banks, faced the risk of insolvency amid an outflow of investors and customers following a string of scandals and losses. Banking experts warned that the bank’s failure could have impacted the entire global financial system.
The turmoil at Credit Suisse is not the only problem weighing on the global banking system, however. Markets were thrown into disarray earlier this month by three bank collapses in the US.
The Fed usually allows liquidity injections when banks outside the US have obligations denominated in dollars but are experiencing reduced access to dollar funding in times of financial turbulence. Such action by the Fed is “very much needed” at the moment, Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA told Bloomberg, especially by the Swiss National Bank and European Central Bank.
“We learned that the hard way during the global financial crisis in 2008 when it took too long to set them up,” she stated. During the global financial crisis of 2008 investors became averse to risks following the infamous collapse of Lehman Brothers, which caused funding markets to seize up and made it hard for European banks to get ahold of US dollars.
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