Central Banks Take Steps To Avert Global Crisis, Ease Dollar Liquidity

At least five central banks in Europe and the US Federal Reserve  have announced new measures to ease strains in the global financial system following the collapse of three banks in just one week.

The coordinated action, the latest effort by policy makers, was announced on Sunday and is expected to boost liquidity in the US dollar swap arrangements.

Central Banks Involved:

According to a statement by Fed, the affected central banks in the dollar swaps will “increase the frequency of 7-day maturity operations from weekly to daily.”  It will be coordinated with the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the Bank of Canada.

Until this new arrangement, the (US) Fed has basically provided access to such arrangements during a squeeze on availability of dollars, which usually arises because banks outside the United States do have greenbacks-denominated obligations, and have limited access to dollar funding in times of financial strain.

Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA, according to a Bloomberg report, said the liquidity injection is “much needed,” especially for the Swiss and European central banks at this time. “We learned that the hard way during the global financial crisis in 2008 when it took too long to set them up. The Fed was much faster in March 2020 and this time around,”  Herrero told Bloomberg.

Prime Business Africa had on Sunday reported that UBS Group AG  had agreed to buy Credit Suisse Group AG in a deal brokered by government and aimed at managing a crisis of confidence  threatening to spread across global financial markets.

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Both Fed and the US Treasury  had in a joint statement aligned with other central banks to welcome the Credit Suisse rescue, just as Treasury Secretary Janet Yellen and Fed Chair Jerome Powell gave the assurance that the capital and liquidity of US banks remain strong.

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Banks had, last week, rushed to borrow cash from the Fed in moves to  shore up liquidity following concern regarding depletion of deposits. Under two backstop facilities, lenders borrowed about $165 billion in an emergency lending that reversed several months’ worth of the Fed’s campaign to shrink its balance sheet.

Daily operations, according to Fed, will begin on Monday, March 20 and will continue at least through the end of April.

The boost to swap lines will “enhance the provision of liquidity,” the central banks said, describing the arrangements as “an important liquidity backstop to ease strains in global funding markets” and mitigate the impact on the supply of loans to households and businesses.