On Sunday afternoon, March 19, 2023, at 5:00 pm ET, the US Federal Reserve, along with several central banks, including the Bank of England, the Bank of Canada, the Bank of Japan, the European Central Bank and the Swiss National Bank, announced a coordinated action to improve the provision of liquidity through standing arrangements for US dollar liquidity swap lines. The announcement followed a banking crisis that began with the collapse of three US banks and spread internationally.
Turmoil in the banking industry leads to coordinated action to improve liquidity
Before Wall Street opened on Monday and before the next Federal Reserve meeting, the US central bank, along with five other major central banks, Announced decisive action to provide liquidity to the financial system. Participating banks included the Bank of England, the Bank of Canada, the Bank of Japan, the Swiss National Bank and the European Central Bank (ECB). In fact, all participating central banks published Press releases regarding the new measures.
“To improve the effectiveness of swap lines in providing US dollar financing, central banks that currently offer US dollar operations have agreed to increase the frequency of operations with a 7-day maturity from weekly to daily,” the announcement details. Federal Reserve. “These daily operations will begin on Monday, March 20, 2023, and will continue through at least the end of April.”
so central banks literally said a way of:
“Calm down guys, deploying more capital”
— poor sun | $BONK enjoyerr | 🔥💃 (@DeChDAO) March 20, 2023
The central banks’ latest plan is a popular topic of conversation on social media and forums as many believe that monetary tightening policies are over. Arthur Hayes, the founder of Bitmex, tweeted about the situation, saying, It’s over!!! This (is) what happens when no one wants to hold USD in banks that cannot borrow from the Fed using the #banktermfundingprogram. I’m not sure how the Fed can go higher when it’s handing dollars to its peers. Cut short short.”
From tightening to relaxing
The turmoil in the banking industry began after the fall of Silicon Valley Bank and Signature Bank. The US Federal Reserve announced a plan to make all uninsured depositors of both institutions complete. Soon after, the Swiss banking giant Credit Suisse showed serious signs of weakness and borrowed 50 billion francs from the Swiss National Bank. The Swiss authorities then orchestrated an emergency takeover of Credit Suisse by UBS, which acquired the financial giant for 3 billion Swiss francs ($3.2 billion).
From SVB, to the medium sized US bank (First Republic), to the global systemic bank (CS), to all the central banks that coordinate…
This escalated fast
— Medium (@Elmidou) March 20, 2023
Additionally, 11 large US lenders pumped $30 billion into First Republic Bank last week. The latest plan from the six central banks could potentially lead to monetary expansion, credit bubbles and more bailouts. By providing liquidity to banks and markets, major central banks support support for credit and money creation within the economy. The decision by the US Federal Reserve and other central banks to increase the frequency of 7-day trading from weekly to daily can be safely considered monetary easing.
“The network of swap lines between these central banks is a set of standing facilities available and serves as an important liquidity backstop to ease stress in global financing markets, thus helping to mitigate the effects of such stress on the supply of credit to homes and businesses. ”, detail the six central banks in the announcement. Also, after Switzerland settled Credit Suisse’s issue with UBS, Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen issued a joint declaration saying:
“We welcome the announcements from the Swiss authorities today to support financial stability. The capital and liquidity positions of the US banking system are strong and the US financial system is resilient. We have been in close contact with our international counterparts to support its implementation.”
What do you think will be the long-term effects of central banks’ decision to increase the frequency of 7-day trading on the global economy? Share your thoughts in the comments section below.
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