Central banks stimulate the flow of US dollars into the global financial system

Six major central banks have come together to boost the flow of US dollars around the world as financial markets digest a tumultuous few weeks for the global banking sector.

The Federal Reserve and five other central banks, the Bank of England, the Bank of Japan, the European Central Bank, the Bank of Canada and the Swiss National Bank, announced on Sunday that they would work together to increase the availability of financing in US dollars around the world. financial system.

The move comes as banks on both sides of the Atlantic have come under pressure in recent weeks as central banks seek to assuage concerns about the state of the banking system.

In the United States, the collapse of Silicon Valley Bank and Signature Bank and subsequent intervention by regulators to protect depositors’ funds prompted a sell-off in global banking stocks, with lingering questions surrounding the strength of the sector American banking.

Meanwhile, Swiss lender UBS announced over the weekend that it had agreed to buy struggling rival Credit Suisse in a landmark government-backed deal aimed at allaying fears over bank stability. world.

News of the merger did not sit well with investors, however, with banking stocks in Asia and Europe falling slightly on Monday while oil prices and US futures also traded in negative territory.

Credit Suisse shares were down nearly 60% at 7:45 a.m. New York time, paring some of their losses from the start of Monday’s trading session.

How will greater availability of the US dollar help?

In an announcement on Sunday, central banks said more liquidity would be provided through existing swap lines.

Swap lines are agreements between two central banks to exchange currencies. In this case, they are designed to improve global liquidity by giving central banks outside the United States the ability to provide US dollar funding to banks in their respective jurisdictions.

The system ultimately allows commercial banks to borrow US dollars directly from their country’s central bank, which in turn borrows from the Fed rather than the open market.

The Fed and Bank of England describe swap lines as an important backstop to ease stress in global funding markets.

Usually, swap lines offer US dollar trades on a weekly basis.

The coordinated action announced on Sunday, however, will allow banks to access dollar funding on a daily basis, with the changes taking effect on Monday and running until at least the end of April.

To improve the effectiveness of swap lines in U.S. dollar funding, central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily, said the Fed in a statement on Sunday.

Central banks say that by using swap lines to improve cash flows and ease stress in global markets, potential pressures on the supply of credit to households and businesses can be minimized.

Doubts

Cameron Parry, CEO of gold bullion savings app TallyMoney, told Fortune on Monday that chaos in the conventional banking system has caused increased interest in gold, which is considered an asset. refuge and that he was skeptical about the depth of the impact. changes to the central bank’s swap lines would have on investor concerns.

Last week, TallyMoney saw new account openings jump 48% from the previous week, Parry said, with the average deposit jumping 55% above the level at the start of March.

The 2008 financial crisis left a legacy of deep public distrust of big banks, a shattered trust that never recovered and is now exposed once again by the recurring threat of contagion and bailouts. banks, Parry said.

Six of the world’s largest central banks are now pumping money into the financial plumbing that connects the global banking system. While this should ward off the immediate risk of a banking crisis, it will do little to restore savers’ confidence in the fragile banking system itself.

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