Central banks around world move to boost flow of
cash amid confidence concerns
Coordinated action echoes steps taken to offset the
impact of the Covid-19 pandemic in 2020 and to shore up the system after the
GFC
Mon 20 Mar
2023 00.37 GMT
Top central
banks, faced with the risk of a fast-moving loss of confidence in the stability
of the financial system, have moved to bolster the flow of cash around the
world.
In
coordination with central banks elsewhere, the US Federal Reserve offered daily
currency swaps to ensure banks in Canada, Britain, Japan, Switzerland and the
euro zone would have the dollars needed to operate.
The change
announced on Sunday is a modest expansion of an existing program in which the
Fed each week pays dollars to other major central banks in exchange for local
currency. By doing so, the Fed, in effect offers low-risk short-term loans that
ensure the world’s major economies have adequate supply of the global reserve
currency to meet local demands.
But the coordinated
action on Sunday still struck a symbolic chord, echoing steps taken to offset
the impact of the Covid-19 pandemic in 2020. It was perhaps even more analogous
to efforts undergird the system after the US housing market collapsed and
stoked a global financial crisis and US recession from 2007 to 2009.
The daily
swaps, beginning on Monday and extending until at least the end of April, will
“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 Fed said in a statement.
The central
bank swap lines have shown little sign of crisis so far, with foreign central
banks holding outstanding swaps with the Fed for only $472m as of 15 March,
versus $446bn at the beginning of the pandemic and a peak of $583bn in 2008.
But trouble
among US midsized lenders as well as the announcement on Sunday of an emergency
rescue of Swiss giant Credit Suisse Group have raised concerns about a looming
and possibly contractionary credit crunch. Such a crisis could arise if the
public lost faith in banks or banks lost faith in each other and started to
limit their exposure to new loans.
The trouble
at Credit Suisse in particular – one of the world’s largest financial
institutions – sent shock waves through global markets last week, raising fears
of a new financial crisis and threatening to derail central bankers’ efforts to
tackle high inflation.
Credit
Suisse found itself in dire need of liquidity last week until it was thrown a
lifeline by its own central bank.
The
coordinated move announced on Sunday will allow the central banks of the euro
zone, Britain, Japan and Canada to each day offer seven-day dollar loans to
their banks.
At least
two major banks in Europe are examining scenarios of contagion possibly spreading
in the region’s banking sector and looking to the Fed and the European Central
Bank to step in with stronger signals of support, two senior executives with
knowledge of the deliberations told Reuters.
The Fed and
Bank of England are due to hold meetings on interest-rate policy this week,
when they will have to strike a difficult balance between their fight against
inflation and worries about financial turmoil.
Analysts
polled by Reuters expect both banks to raise rates by 25 basis points.
But LH Meyer
economist Derek Tang wrote that the actions on Sunday suggested greater worry
about “risk from financial contagion, and on the margin could put … a rate hike
by the FOMC on Wednesday in a bit more doubt.”
“To
announce joint action so decisively provides a sense of security but also
reveals enough anxiety on their part that they feel the need for more insurance
against bad outcomes.”
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