On Sunday, March 19, seven major banks collaborated to unveil a coordinated action to bolster the provision of U.S. dollar liquidity through swap line arrangements. The banks that joined hands include The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank.
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Swap lines are basically agreements between central banks to exchange currencies. In the most basic essence, such arrangements assist a central bank in obtaining foreign currency from the central bank that issues it, and in turn, distribute it to commercial banks in their country.
According to the official press release, the network of swap lines among these central banks “is a set of available standing facilities.” In fact, they serve as an “important liquidity backstop” to ease exertions in global funding markets. Consequentially, it aids in mitigating the retrospective effects on the supply of credit to businesses, households, etc.
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Operations to commence on March 20
The latest initiative has been taken to “improve” the swap lines’ effectiveness in providing U.S. dollar funding. Notably, the central banks currently offering U.S. dollar operations have agreed to expand the frequency window of 7-day maturity operations from weekly to daily.
The latest agreement has the potential to serve as a key tool to preserve financial stability and avert market tension from affecting the macroeconomy. Furthermore, it is worth noting,
“These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.”
It is worth noting that Sunday’s statement was released hours after UBS revealed that it is ready to acquire Credit Suisse for up to $1 billion.
Of late, the financial landscape has been amid a banking sector crisis. In fact, the abrupt shutdown of a host of prominent banks in a short period of time took people by surprise. In an attempt to pour water over the fire, and assist the institutions in need, regulators have adopted several measures. Towards the end of last week, the Federal regulators indicated that they will continue aiding the distressed sector. The Reserve “stands ready” to provide liquidity via the discount window to all eligible institutions.
Also Read: Fed ‘Stands Ready’ to Provide Liquidity to Eligible Institutions