NEW YORK – The US Federal Reserve and five other central banks announced coordinated action on Sunday to boost liquidity in US dollar swap arrangements, the latest effort by policymakers to ease growing strains in the global financial system.
The move comes amid heightened tension that began with the collapse of three US lenders a week ago. Earlier on Sunday, UBS Group agreed to buy Credit Suisse Group in a government-brokered deal aimed at containing a crisis of confidence that threatened to spread across global financial markets.
Central banks involved in the dollar swaps will “increase the frequency of seven-day maturity operations from weekly to daily”, the Fed said in a statement coordinated with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.
The liquidity injection is “very much needed”, especially for the Swiss and European central banks right now, said Dr Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis. “We learnt 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.”
The US central bank has typically provided access to such arrangements at times when there is a squeeze on the availability of dollars. This can arise because banks outside the United States typically have obligations that are denominated in greenbacks, and in times of financial strain have less access to dollar funding.
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.
The Fed said daily operations are to begin on March 20 and will continue at least till the end of April.
In a joint statement earlier on Sunday, the Fed and the US Treasury joined other central banks in welcoming the Credit Suisse rescue. Treasury Secretary Janet Yellen and Fed chair Jerome Powell stressed that the capital and liquidity of US banks are strong.
Last week, banks rushed to borrow cash from the Fed as they sought to shore up liquidity amid concern about a flight of deposits. Lenders borrowed some US$165 billion (S$221 billion) in total under two backstop facilities. Altogether, the emergency lending reversed several months’ worth of the Fed’s campaign to shrink its balance sheet. BLOOMBERG
