The Federal Reserve and five other major central banks have taken new steps to increase global access to dollar liquidity as financial markets reel from turmoil in the banking sector.
In a joint statement on Sunday, central banks said that, starting tomorrow, they would switch from weekly auctions to daily dollar auctions to “ease the strain on global funding markets”.
Daily swap lines between the Fed and the European Central Bank, the Bank of England, the Swiss National Bank, the Bank of Canada and the Bank of Japan will run at least until the end of April, officials said.
The announcement of a daily dollar auction in the time zone – the last policy implemented during the 2020 Covid shock – came hours after the SNB announced that Switzerland’s two biggest banks, UBS and Credit Suisse, would merge after a confused weekend of negotiations.
European officials are concerned that the heavy losses imposed on Credit Suisse shareholders, and bondholders holding alternative tier one – or AT1 – debt, could increase the stress in the bank funding market this week.
The Fed’s swap line network, first established in 2007, has provided an important funding backstop for global banks during times of acute market stress. Lenders outside the U.S. can use swap lines to access dollars in exchange for domestic currency by providing collateral at their respective central banks.
The ECB’s governing council held a call on Sunday afternoon to approve a switch to a daily swap line with the Fed.
“This network of swap lines between central banks is a set of available standing facilities and is an important liquidity backstop to reduce strains in the global funding market, thus helping to reduce the effects of these strains on the supply of credit to households and businesses,” he said. central bank.
The BoE said it would announce details of its daily operations at 8.15am London time. The operation will take place at 8.15 am with the closing time for bids at 8.45 am and the results will be declared at 10 am or soon after. The funds will be offered at a rate equal to the US overnight interest rate plus 25 basis points.
The Fed also has a facility that allows central banks and international monetary authorities to enter into repurchase agreements with central banks and trade US Treasuries for dollars.
The repo facility called “FIMA” was first established as part of the Fed’s emergency measures to contain the fallout from the Covid crisis and was made permanent in 2021.
Additional reporting by Delphine Strauss in London