Central banks announce dollar liquidity measures to ease banking crisis

The Federal Reserve and five other leading central banks have taken new steps to improve global access to dollar liquidity as financial markets reel from the turmoil affecting the banking sector.

In a joint statement on Sunday, the central banks said that from tomorrow they will switch from weekly to daily auctions of dollars in a bid to “ease the strain on global funding markets”.

The 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 until at least the end of April, the officials said.

The announcement of daily dollar auctions across time zones ̵[ads1]1; a policy last put in place 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 hectic weekend of negotiations.

European officials are concerned that the heavy losses inflicted on Credit Suisse’s shareholders, and bondholders holding the alternative tier 1 debt – or AT1 debt – could add to stress in bank funding markets this week.

The Fed’s swap line network, first established in 2007, has provided global banks with important funding support during periods of acute market stress. Lenders outside the US can use the swap lines to access dollars in exchange for their domestic currencies by posting collateral with their respective central bank.

The ECB’s Governing Council held a call on Sunday evening to approve the move to a daily swap line with the Fed.

“The network of swap lines among these central banks is a set of available standing facilities and acts as an important liquidity backstop to ease the strain in global funding markets, thereby helping to mitigate the effect of such strains on the supply of credit to households and businesses.”, the central banks said.

The BoE said it would announce details of each day’s operation at 8.15am London time. The operations will take place at 8.15 with a closing time for bids at 8.45 and the results announced at 10.00 or shortly thereafter. The funds will be offered at a rate equal to US overnight rates plus 25 basis points.

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

The so-called “FIMA” repo facility was first erected 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