World Banks Coordinate To Boost Liquidity To Shaky Markets

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank (ECB), the Federal Reserve and the Swiss National Bank are coordinating actions to boost liquidity to the global financial system, said a statement from the ECB.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," says the ECB.

These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar Overnight Index Swap (OIS) rate plus 50 basis points. The new pricing starts from 5 December 2011 and goes until 1 February 2013. Analysts welcomed the news cautiously, saying it is one step short of printing more money (so-called 'quantum easing) but that the new pricing was a positive sign of more co-ordinated efforts to come.

A swap line is a currency arrangement between central banks. They agree to keep a supply of their country's currency available to trade to other central banks at the going exchange rate. This keeps liquidity available for central banks to lend to their private banks to maintain their reserve requirements. This liquidity helps keep financial markets functioning smoothly.

European Central Bank Decision

The Governing Council of the European Central Bank (ECB) decided in co-operation with other central banks the establishment of a temporary network of reciprocal swap lines.  This will enable the Eurosystem to provide euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese yen, sterling, Swiss francs and Canadian dollars (in addition to the existing operations in US dollars).

The ECB will regularly conduct US dollar liquidity-providing operations with a maturity of approximately one week and three months at the new pricing.

In addition, the initial margin for three-month US dollar operations will be reduced from currently 20% to 12% and weekly updates of the EUR/USD exchange rate will be introduced in order to carry out margin calls, said the ECB.

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