In a joint statement, the US Federal Reserve and five other major central banks announced they are launching a coordinated effort to increase the flow of US dollars throughout the global financial system using swap-line arrangements. The five other major banks were the Bank of Canada, Bank of England, Bank of Japan, the European Central Bank, and Swiss National Bank.
By increasing the frequency of weekly seven-day maturity operations to daily, the banks are seeking to, “enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements.” Swap lines are a means for central banks to exchange currencies with each other, so one of the central banks can then supply that foreign currency to commercial banks in the country which need it to settle obligations in that currency.
The operations will begin Monday, and continue at least through the end of April. The regulators stated the operations are designed, “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 announcement was made on the heels of news that Switzerland’s largest bank agreed to buy out Credit Suisse, in a deal set up by the Swiss government. The deal became necessary as Credit Suisse, designated one of thirty globally systemically important banks, ran the risk of insolvency amid a surge of depositor and investor outflows, precipitated by a string of scandals and losses.
Banking experts warned the bank’s failure could have struck a devastating blow to the entire global banking system, especially coming right after the failure of three midsized lenders in the United States within a week.
Liquidity injections are usually supported by the Federal Reserve when banks outside the United States have dollar-denominated obligations, but have reduced access to dollars due to financial turbulence.
Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA said in an interview with Bloomberg that this action was, “very much needed,” right now, especially at the Swiss National Bank, and the European Central Bank.
She stated, “We learned that the hard way during the global financial crisis in 2008 when it took too long to set them up.”
In the 2008 financial crisis, the collapse of Lehman Brothers caused a seizing up of funding markets as investors grew risk-averse, which meant European banks could not get ahold of US dollars.
