June 5, 2023

Great Indian Mutiny

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Central banks announce dollar liquidity measures to ease the banking crisis

The Federal Reserve and five other leading central banks have taken new measures to improve global access to dollar liquidity as financial markets experience turmoil in the banking sector.

Central banks said in a joint statement on Sunday that they would move from weekly to daily dollar auctions in an effort to “ease pressures in global financing markets.”

Officials said 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 continue at least until the end of April.

The announcement of daily dollar auctions across time zones β€” a policy recently put in place during the 2020 Covid shock β€” came hours after the Swiss National Bank announced the merger of Switzerland’s two largest banks, UBS and Credit Suisse, after a frantic weekend of negotiations.

European officials are concerned that the huge losses imposed on Credit Suisse shareholders and bondholders holding its alternative Tier 1 debt – or AT1 – could add pressure to bank financing markets this week.

The Federal Reserve’s network of swap lines, first established in 2007, has provided an important financing backbone for global banks during periods of acute market stress. Lenders outside the United States can use swap lines to access dollars against their domestic currencies by pledging collateral at their central bank.

The ECB’s governing council held a call on Sunday evening to approve the switch to a daily swap line with the Federal Reserve.

β€œThe network of swap lines between these central banks is a set of permanent facilities available and serves as an important liquidity pillar to relieve pressures in global financing markets, and thus help mitigate the effects of these pressures on the provision of credit to households and companies,” Central Banks He said.

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The Bank of England said it would release details of each day’s operations at 8.15am London time. Operations will take place at 8.15am with a bid closing time of 8.45am and results will be announced at 10am or shortly thereafter. Funds will be offered at a rate equal to US overnight rates plus 25 basis points.

The Fed also has a facility that allows central banks and international monetary authorities to enter into repurchase agreements with the central bank and trade US Treasury notes for dollars.

The so-called “FIMA” buyback facility was first set up as part of federal emergency measures to contain the fallout from the Covid crisis and was made permanent in 2021.

Additional reporting by Delphine Strauss in London