The U.S. Federal Reserve has announced a coordinated effort with five other central banks aimed at keeping dollars flowing amid a series of banking collapses in the U.S. and Europe.
The Fed's March 19 statement came just hours after Switzerland-based Credit Suisse was bought by UBS for $3.25 billion as part of an emergency plan led by Swiss authorities to preserve the country's financial stability .
According to the U.S. Federal Reserve, a program to support liquidity conditions will be implemented through "swap lines" - agreements between two central banks to exchange currencies. The swap line was previously a similar emergency action by the Fed during the 2007-2008 global financial crisis and 2020 in response to the COVID-19 pandemic. The swap lines initiated by the Fed are intended to improve liquidity in dollar funding markets amid difficult economic conditions.
“In order to improve the effectiveness of the swap lines for funding U.S. dollars, central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturities from weekly to daily,” the Fed said in a statement.
The swap line network will include the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank. It will start on March 20 and run until at least April 30. The move also comes amid poor prospects for the U.S. banking system, with Silvergate Bank and Silicon Valley Bank failing and the New York Financial Services District taking over Signature Bank. However, the Fed made no direct reference to the recent banking crisis in its statement. Instead, it explained, they implemented a swap line agreement to enhance the supply of credit to households and businesses:
"The network of swap lines among these central banks is an available standing facility and an important liquidity backstop to ease stress in global funding markets, thereby helping to mitigate the impact of such stress on the supply of credit to households and businesses" The Fed's latest statement sparked debate over whether the arrangement constituted quantitative easing.
American economist Danielle DiMartino Booth argues that these arrangements have nothing to do with quantitative easing or inflation, nor do they "loosen" financial conditions: The Fed has been trying to prevent the banking crisis from escalating. Last week, the Fed laid out a $25 billion funding program to ensure banks have enough liquidity to meet client demand amid tough market conditions.
A recent analysis of the SVB collapse by several economists found that as many as 186 U.S. banks were at risk of insolvency:
"Even if only half of uninsured depositors decide to withdraw, nearly 190 banks are at potential risk of harm to insured depositors, with potentially $300 billion in insured deposits at risk."
