The United States Federal Reserve has announced a coordinated effort with five other central banks aimed at keeping the US dollar flowing amid multiple banking meltdowns in the US and Europe.
The March 19 announcement from the US Fed came just hours after Switzerland-based bank Credit Suisse was bought by UBS for nearly $2 billion as part of an emergency plan led by Swiss authorities to maintain the country’s financial stability.
According to the Federal Reserve Board, the plan to maintain liquidity conditions will be implemented through a “swap line” – an agreement between two central banks to exchange currencies.
The swap line previously served as an emergency-like action for the Federal Reserve in the 2007-2008 global financial crisis and the 2020 response to the COVID-19 pandemic. The swap lines initiated by the Federal Reserve are designed to increase liquidity in the dollar funding market during difficult economic conditions.
Coordinated central bank action to increase US dollar liquidity: https://t.co/Qs4cYY8BFO
– Federal Reserve (@federalreserve) March 19, 2023
“To increase the effectiveness of swap lines in providing US dollar funding, central banks that currently offer US dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily,” the Fed said in a statement.
The swap line network will include the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank. It will start on March 20 and last until at least April 30.
The move also comes amid a negative outlook for the US banking system, with Silvergate Bank and Silicon Valley Bank (SVB) collapsing and the New York District of Financial Services (NYDFS) takeover of Signature Bank.
But the Federal Reserve made no direct reference to the recent banking crisis in its statement. However, it explains that they carry out swap line agreements to strengthen the supply of credit for households and businesses:
“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 global funding markets, thereby helping to reduce the effects of these strains on the supply of credit to households and businesses.”
The Fed’s latest announcement has fueled a debate over whether the arrangement is quantitative easing.
US economist Danielle DiMartino Booth argued that the adjustment was not related to quantitative easing or inflation and did not “loosen” the financial situation:
MOMENT TO PREVENT MISINFORMATION
A swap line is not a loose financial situation.
Another example: You are a doctor. The patient had a heart attack. You can SEE the paddles to revive him/her but you cannot REACH the paddles. This line swaps your HANDS paddles. https://t.co/RXOPiBmsif
– Danielle DiMartino Booth (@DiMartinoBooth) March 19, 2023
The Federal Reserve has worked to prevent the escalation of the banking crisis.
related: Banking crisis: What does it mean for crypto?
Last week, the Federal Reserve set up a $25 billion funding program to ensure banks have enough liquidity to cover customer needs in difficult market conditions.
A recent analysis by several economists of the collapse of SVB found that up to 186 US banks are at risk of insolvency:
“Even if only half of uninsured depositors decide to withdraw, nearly 190 banks are at risk of potential disruption to insured depositors, with a potential $300 billion in insured deposits.”
Cointelegraph reached out to the Federal Reserve for comment but did not receive an immediate response.