Central banks to boost flow of US dollars amid market unease

Central banks have moved globally to keep credit flowing after a period of uncertainty over the merger of the US banking sector and Credit Suisse.

Six central banks, including the Bank of England, have announced they will facilitate the flow of US dollars through the global financial system.

The USD liquidity ‘swap line’ arrangement will be implemented from Monday.

In a statement, the Bank of England, the Bank of Japan, the Bank of Canada, the European Central Bank, the US Federal Reserve Bank and the Swiss National Bank launched concerted actions to “strengthen the supply of liquidity”.

It said the announcement would serve as a “significant backstop to ease tensions in global funding markets” and reduce the impact on the supply of credit to households and businesses.

Instead of borrowing on the open market, UK banks can go directly to the Bank of England and borrow from the US Federal Reserve.

It works equally well for Eurozone, Canadian, Japanese, Swiss and US banks.

Banks will have daily access to this fund.

The Bank of England said the deal, adopted during the 2008 financial crisis and Covid pandemic, will begin on Monday and last “at least until the end of April”.

Global bank stocks plunged following the failure of Silicon Valley Bank, despite President Joe Biden’s reaffirmation that the US would do “whatever it takes” to protect the banking system.

Since the SVB’s demise, smaller undersigned banks were also lost and in need of rescue by the First Republic.

The announcement of ‘coordinated action’ by the world’s six largest central banks shows just how serious general tensions over vulnerabilities in the global banking system are.

The facility has been vacant in the UK since the pandemic struck just three years ago, putting it in financial trouble. This is not as dramatic a move as the Bank of England had to roll out after last autumn’s mini-budget, for example. But while the past week has been dominated by identifiable bank-specific issues, bankruptcies of erstwhile giants such as Credit Suisse may be enough to ignite more general concerns. It clearly shows that there is

What is worrisome is not that the problems at Credit Suisse or Silicon Valley Bank have a direct impact, but that a set of common factors are affecting other financial institutions. For example, thanks to technology and influenced by social media comments, uninsured deposits are flowing at an incredible rate from some financial institutions to large ones without anyone ever visiting a branch. It’s leaking. There is also an uncertain response by some regulators.

The big picture is, as I said earlier, rapidly rising interest rates have always set off ticking time bombs with some financial institutions and some darker parts of the financial plumbing that players have started to rely on a bit. about it. at very low interest rates. This is what is happening now.

The more soothing news is, for example here, that British banks are well capitalized and have a lot of money, or that the Bank of England said it was ‘safe and sound’ on Sunday. But the fact that it has joined forces with counterparts around the world is a sign of strength, an attempt to prevent the risk from spreading.

In particular, there are concerns that higher interest rates on funds that banks lend to each other could permeate the economy quickly and have very real consequences.