WASHINGTON — The Federal Reserve and other major global central banks announced Sunday they would work to ensure dollars remain readily available throughout the global financial system amid a strain from banking explosions in America and banking troubles in Europe.
The Fed, Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank said they would offer so-called swap operations more frequently – which help foreign banks access US dollar funding for weeks – up April. Instead of being weekly, the deals will be daily for now.
The point of the move is to try to avert turbulent conditions in the markets as nervous investors react to the explosions of Silicon Valley Bank and Signature Bank in the United States and UBS’s arranged takeover of Credit Suisse in Europe. The upheaval in the financial sector can easily be exacerbated when investors struggle to move their money – something that often happens during moments of stress due to a lack of dollar funding. Alternating lines can help relieve this pressure.
However, the fact that central banks are increasing swap lines underscores how serious the consequences of banking problems have become: central banks typically withdraw such programs in the face of acute problems, as in the 2008 financial crisis or the 2020 market crisis at the start of the coronavirus Pandemic.
According to the central banks, the move was “a coordinated action to improve liquidity provision”.
The move comes before a big week for the Fed. The US Federal Reserve is expected to meet on Wednesday and announce its latest rate decision.
Up until a few weeks ago, it seemed possible that the Fed could take a big half-point step at this meeting as it sought to combat surprisingly stubborn inflation in an economy that had shown itself to be remarkably resilient.
But with the turmoil in the global banking system, investors now think a big move is unlikely: betting on a smaller quarter-point move or no move at all while officials wait to digest how the financial system is handling recent developments. Also, turbulence in the banking sector may lead to less lending, which in turn could help slow the economy.
The move was part of the Fed’s ongoing push to ensure stability in the global financial system. Just a week ago, the Fed and other regulators announced that Signature Bank had failed and moved to secure uninsured deposits with that company and Silicon Valley Bank. The Fed also set up an emergency lending program to help banks get through a difficult period.
This program allows banks to use bonds and other assets as collateral for borrowing, and it values these securities at their original prices, not at the prices at which they are currently traded in the markets. For banks that are sitting on assets worth less after a year of steep Fed rate hikes to combat rapid inflation, this could serve as a kind of relief valve, allowing them to raise cash without realizing big losses.
Comments are closed.