The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank have today announced a coordinated actions to enhance their capacity to provide liquidity support to the global financial system.
These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar overnight index swap (OIS) rate plus 50 basis points instead of OIS rate plus 100bps. This pricing will be applied to all operations conducted from 5 December 2011. The authorisation of these swap arrangements has been extended to 1 February 2013.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. It is interesting to look at this announcement in relation to the depletion of Euro-area bank deposits and the recent press surrounding the so-called contingency plans by European businesses, should each country in the Euro-area have to revert back to its original currency (front page story on FT).
The purpose of these measures, according to the Federal Reserve, is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses. I would imagine it is mainly an effort to help the ECB and the European banking system with any liquidity difficulties they are currently experiencing.
The Federal Reserve stated that it has a range of tools available to provide an effective liquidity backstop for financial institutions that experience liquidity problem, and is prepared to use these tools as needed to support financial stability.
The co-ordination among the world’s central banks is impressive, and if taken together with China’s announcement on Wednesday to reduce their banks' reserve requirements, the initiative is encouraging. This announcement also indicates that the Central Banks have become increasingly concerned about the liquidity constraint in the Euro-area. It should result in some Dollar weakness (but then again many things should result in Dollar weakness).