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 moved to bolster liquidity across financial markets increasing the frequency of standing US dollar liquidity swap line arrangements.
These seven-day maturity operations —which enable foreign central banks to deliver US-dollar funding to institutions in their respective jurisdictions — have now increased from once per week to daily.
Daily operations commenced on Monday, 20 March 2023, and are expected to run for over a month, ending in late April.
In a statement released on Sunday, 19 March, the Federal Reserve said the swap lines would serve as a “liquidity backstop”, helping to “ease strains in global funding markets”.
This is also expected to support the supply of credit to households and businesses.
The coordinated effort to enhance liquidity in the global financial market follows the collapse of three US banks — Silvergate Capital, Signature Bank, and Silicon Valley Bank (SVB).
The banking failures have been attributed to poor capital management exposed by aggressive monetary policy tightening, with assets disproportionately tied to long-term government bonds.
Financial regulators are fearing contagion risks across the banking system, with California-based First Republic Bank and global investment bank Credit Suisse also subject to stability concerns.
Credit Suisse has suffered from a sharp deterioration in investor sentiment off the back of a spike in outflows in the December quarter of 2022, and a report detailing shortcomings in its financial reporting practices.
Swiss competitor UBS has since moved to acquire all Credit Suisse shares for a consideration of approximately $4.8 billion, securing pre-approval from Swiss regulators.
Meanwhile, First Republic Bank has sought to reassure depositors and investors of its balance sheet strength, with markets concerned the lender would suffer the same fate as SVB — a fellow California-based regional bank also highly exposed to the troubled technology sector.
The private bank and wealth management firm recently confirmed its receipt of uninsured deposits totalling US$30 billion (AU$45 billion) with an initial term of 120 days at market rates.
The funding boost, received on Thursday (16 March), has come from a host of major banking institutions — Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, PNC Bank, State Street, Truist, and U.S. Bank.
The deposit influx builds on additional liquidity sourced by First Republic via loan facility drawdowns, actioned following the collapse of SVB.
Earlier this month, the Fed also committed to providing funding to eligible depository institutions in a bid to “help assure banks have the ability to meet the needs of all their depositors”.
Despite this contingency measure, the regulators assured markets that the US banking system “remains resilient and on a solid foundation”, supported by reforms introduced following the global financial crisis.
Analysts are also expecting the Fed to slow or halt its monetary policy tightening cycle.
Fed chair Jerome Powell had hinted at a longer-than-anticipated tightening cycle to curb stubborn high inflation, but amid instability in the banking system, the Federal Open Market Committee (FOMC) is tipped to either reduce the size of future hikes to 25 bps, if not cease tightening altogether.
This is expected to have flow-on effects in other parts of the world, including in Australia, where the Reserve Bank of Australia (RBA) is expected to pause its tightening cycle during its next monetary policy board meeting on Tuesday, 4 April 2023.
