Central banks want to improve dollar supply in joint action

US Federal Reserve

The central banks want to strengthen the stability of the financial system.

(Photo: dpa)

In view of the recent banking turmoil, the major central banks are intervening to improve the supply of the dollar to the financial sector. The European Central Bank (ECB) and the central banks of the USA, Japan, Great Britain, Switzerland and Canada are involved in the coordinated action, as they announced late Sunday evening.

The existing agreements on dollar currency exchange would be used to strengthen the supply of liquidity, as the US Federal Reserve said. The central banks agreed to conduct the seven-day trades daily instead of weekly. That should start this Monday. Daily operations are expected to continue until at least the end of April.

The network of swap lines between these central banks is an important system that serves as a liquidity backstop, according to the ECB. This is ready to reduce tensions on the global financial markets. It helps to mitigate the impact of such strains on the supply of credit to households and businesses both at home and abroad.

The surprising announcement came shortly after UBS’s takeover of Credit Suisse became known. ECB boss Christine Lagarde emphasized on Sunday: “The banking industry in the euro area is resilient and has strong capital and liquidity positions.” The ECB has all the necessary instruments to “supply the financial system of the euro zone with liquidity if necessary.”

Analysts are skeptical

Analysts initially reacted with concern to this initiative on Sunday. “When central banks rush to take action to make sure everything is fine, then things are actually not fine,” said Jeroen Blokland of analysis house True Insights. He advised continued caution when investing in risky asset classes such as stocks.

Capital market expert Mohamed El-Erian assumes that in future the focus will not only be on the risk of contagion for the global financial system, but also on possible spillover effects on the real economy. The turbulence from the banking system is also a risk for the US economy, “which has so far shown itself to be very robust,” El-Erian told the Bloomberg news agency. With their joint action, the central banks wanted to “minimize the risk that the banking crisis would also mean that the markets would no longer function properly and that there would be economic setbacks.”

>> Read also: “Too big to fail”: The return of the banking problems scares politicians

After the bankruptcy of the Silicon Valley Bank (SVB) and the New York Signature Bank, the focus in the USA has primarily shifted to the smaller banks. Customers have withdrawn billions of dollars in funds and parked them with big banks like JP Morgan Chase and Bank of America. Wall Street’s big houses are more tightly regulated and may be better positioned to cushion problems.

But the smaller institutes grant around 30 to 40 percent of the loans in the USA, according to an analysis by Torsten Slok, chief economist at the private equity firm Apollo. They therefore play a central role in providing households and companies with credit. However, Slok believes banks are now becoming more cautious about lending. You also have to adapt to new regulations. All of this will make your business much more difficult in the future.

US banks are already borrowing billions from the Fed through a new support program

The Fed imposed a new support program for financial institutions only last Sunday after the bankruptcies of SVB and Signature. Banks can get loans from the Fed and deposit bonds as collateral. The securities are recognized at their nominal value, even if the institutions would have to sell them on the market at a loss.

Book losses on bonds had become fatal for the SVB. The bank had to sell it at a loss, triggering panic among investors and customers. Given the recent rapid rise in interest rates in the US, a number of banks have unrealized losses in their bond portfolios.

In the past few days, institutions have borrowed money from the Fed at a record pace. The Fed lent nearly $12 billion in one week through the new program. Banks used the Fed’s regular discount window to get around $153 billion in additional liquidity. That’s more than the previous record of $111 billion set during the 2008 financial crisis.

>> Also interesting: Warren Buffett apparently intervenes in the banking crisis

The new loan program is seen in the financial sector as “an implicit guarantee for all deposits,” explains Markus Brunnermeier, economics professor at the renowned Princeton University. However, this has not reassured savers and investors so far. Economists and regulators in the US are currently debating whether an explicit guarantee of all bank deposits is necessary to restore the necessary confidence.

The Fed’s interest rate decision is due on Wednesday. There is currently a heated discussion on Wall Street about whether the banking crises in the USA and Switzerland will force Fed Chairman Jerome Powell to take a pause on interest rates. Blokland is currently no longer assuming that the Fed will hike rates.

Futures on the major US stock indices reacted positively shortly after the market opened on Sunday. The futures on the leading index Dow rose by 0.2 percent. The tech-heavy Nasdaq 100 rose 0.5 percent.

With agency material

More: All current developments in the banking crisis in the live blog

source site-11