Global central banks reinforce cash flow to help banks – 03/20/2023 – Market

The world’s main central banks, faced with the risk of a rapid loss of confidence in the stability of the financial system, acted on Sunday (19) to reinforce the flow of money around the world.

In coordination with central banks elsewhere, the Fed has offered daily currency swaps to ensure that banks in Canada, the UK, Japan, Switzerland and the eurozone have the dollars they need to operate.

The move is a modest expansion of an existing program in which the Fed weekly pays dollars to other major central banks in exchange for local currency. In doing so, the bank is actually offering short-term, low-risk loans that ensure that the world’s major economies have an adequate supply of the global reserve currency to meet local demands.

Daily swaps, which begin this Monday (20) and extend at least until the end of April, “will serve as an important liquidity support to ease tensions in global funding markets, thus helping to mitigate the effects of such tensions in the supply of credit to households and businesses,” the Fed said in a statement.

Eurozone banks borrowed just US$5 million (R$26.3 million) this Monday from the European Central Bank through the instrument presented on Sunday.

Central bank swap lines have shown little sign of a crisis so far, with foreign central banks holding outstanding swaps with the Fed for just $472m on March 15, up from $446bn. R$2.3 trillion) at the beginning of the pandemic and a peak of US$583 billion (R$3 trillion) in 2008.

But troubles among midsize US banks, as well as Sunday’s announcement of an emergency bailout by Swiss giant Credit Suisse Group AG, raised concerns about an impending and possibly contractionary credit crunch. Such a crisis could arise if the public loses trust in banks or banks lose trust in each other and begin to limit their exposure to new loans.

Troubles at the Swiss bank in particular – one of the world’s biggest financial institutions – sent shock waves through global markets last week, raising fears of a new financial crisis and threatening to derail efforts by central bankers to fight high inflation.

Credit Suisse found itself in dire need of liquidity last week, until its own central bank threw in bailouts.

CONTAGION SCENARIOS

The coordinated measure announced on Sunday will allow central banks in the euro zone, UK, Japan and Canada to offer daily seven-day dollar loans to their banks.

At least two of Europe’s biggest banks are examining scenarios of contagion that could spread to the region’s banking sector and expect 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 will hold policy meetings this week, when they will have to strike a difficult balance between fighting inflation and concerns about financial turmoil.

Analysts polled by Reuters expect both banks to raise rates by 25 basis points.

Additional reporting by Dan Burns in New York