Central banks announce dollar liquidity measures to ease banking crisis

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

In a joint statement on Sunday, the central banks said that, from tomorrow, they would switch from weekly to daily auctions of dollars in an effort to “ease strains in 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 would run at least until the end of April, the officials said.

The announcement of daily dollar auctions across time zones — a policy last put in place during the 2020 Covid shock — came hours after the SNB announced that Switzerland’s two largest banks, UBS and Credit Suisse, would merge after a frantic weekend of negotiations.

European officials are concerned that the heavy losses imposed on Credit Suisse’s shareholders, and bondholders holding its alternative tier one — or AT1 — debt, could increase stress in bank funding markets this week.

The Fed’s swap line network, first set up in 2007, has provided an important funding backstop for global banks 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 pledging collateral at their respective central bank.

The ECB’s governing council held a call on Sunday evening to approve the switch 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 serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects 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. Operations would take place at 8.15am with a closing time for bids of 8.45am and the results announced at 10am or shortly afterwards. The funds would be offered at a rate equivalent to overnight US interest 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 Treasuries 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