The Fed and other central banks are trying to avoid the crisis by increasing the flow of dollars
The US Federal Reserve and several other major central banks announced a coordinated effort late Sunday to boost the flow of US dollars through the global financial system in an effort to maintain credit to households and businesses.
“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank today announce coordinated action to improve the provision of liquidity through the permanent credit line. ‘US dollar liquidity swap arrangements,’ the central banks said in a joint statement.
Sunday’s statement came just hours after Swiss authorities orchestrated an emergency takeover of Credit Suisse by UBS. Credit Suisse – one of the 30 largest banks in the global financial system – was bleeding money last week after investor and customer confidence plummeted.
Market turmoil sparked by the second and third largest bank failures in US history earlier this month threatens to make it harder for people to borrow money, the secretary said last week. US Treasury, Janet Yellen.
“If the banks are in trouble, they might be reluctant to lend,” Yellen said Thursday during testimony before the Senate Finance Committee. “We could see credit becoming more expensive and less available.”
Christine Lagarde, president of the European Central Bank (ECB), told reporters on Thursday that “persistently high tensions in the markets” could further tighten credit conditions that were already tightening in response to rising interest rates.
Swap lines are agreements between two central banks to exchange currencies. They allow a central bank to obtain foreign currency from the central bank that issues it and distribute it to commercial banks in their country.
The swap line between the US Federal Reserve and the ECB, for example, allows the ECB to receive US dollars in exchange for an equivalent amount in euros. The ECB can then distribute these dollars to the commercial banks of the 20 countries that use the euro.
According to the ECB, the agreements can be an important tool to preserve financial stability and prevent market tensions from affecting the economy. During the 2008 global financial crisis following the bankruptcy of Lehman Brothers, funding markets dried up due to extreme risk aversion. Under these circumstances, it has become difficult for eurozone banks to obtain US dollars.
From Monday through at least the end of April, the Fed and other central banks will make dollars available on a daily rather than weekly basis.
“The network of swap lines between these central banks is a set of standing facilities available and serves as an important backstop to ease stresses in global funding markets, helping to mitigate the effects of such stresses on the supply of household and business credit,” they added.