BoC, Fed and four other central banks stepped in to keep U.S. dollars flowing through the financial system
The Bank of Canada, U.S. Federal Reserve and four other central banks stepped up efforts to keep U.S. dollars flowing through the financial system on Sunday by enhancing their so-called swap lines. These allow central banks to trade their own currency with one another, giving non-U.S. financial institutions access to U.S. dollars in the event of a sudden liquidity crunch.
The Sunday announcement highlights growing concern among officials that the failure of Silicon Valley Bank and the frantic merger of UBS and Credit Suisse could undercut confidence throughout the global financial system. If banks lose trust in one another, the wholesale markets they rely on to fund much of their operations can seize up – something that happened in the 2007-2008 Financial Crisis and again in March 2020 at the outbreak of the COVID-19 crisis.
Likewise, the Swiss Central Bank offered up to 50 billion Swiss francs in emergency credit to Credit Suisse last week. “A key point to stress is that the global banking system as a whole remains well capitalised,” Neil Shearing, chief economist at Capital Economics said in a note to clients on Monday. “Likewise, central banks can also take comfort from the fact that new tools that have been put in place over the past few years to provide liquidity to financial institutions are working and can be expanded if needed.
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