Central Banks Announce Expansion of Backstop Liquidity Amid Bank Collapses

The world’s key central banks have announced an expansion of backstop liquidity amid bank collapses.

The Bank of England, Japan, Europe’s Central Bank, the Federal Reserve, and that of Canada and the Swiss National Bank, will now carry swaps daily rather than weekly, starting today.

The network of swap lines “serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses,” the central banks said.

The move came just hours after the Swiss Financial Market Supervisory Authority (FINMA) announced an historic merger of Credit Suisse and UBS following months of stock market turbulences for the former.

“The Credit Suisse Group is experiencing a crisis of confidence, which has manifested in considerable outflows of client funds,” FINMA said. “There was a risk of the bank becoming illiquid, even if it remained solvent, and it was necessary for the authorities to take action.”

The details of the action by the authorities are a bit hazy, with “guarantees for potential losses” to be provided by the Swiss Confederation as well as a loan by the Swiss National Bank “covered by a federal guarantee.”

“The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient,” the chair of the Federal Reserve Banks Jerome Powell and the US Treasury Secretary Janet Yellen said late on Sunday.

So closing an episode of sorts, with it anyone’s guess whether there’s more to come as markets now turn their attention to what might be one of the most highly anticipated speech by Fed’s chair following an interest rates decision by the board on Wednesday.

For the first time in more than a year, the market is divided on what the board will do, with 60% voting on a 0.25% hike, while 40% think they will keep the rates at the current level.

That decision itself however might be secondary to what they say as 25 basis points or zero on 5% hardly moves the needle.

But the banking troubles we have seen require a new assessment and just what that is exactly, as far as the Fed is concerned, will be of significant interest to the market.

A market that looks forward, maybe to September or October when the full effect of these rates might come to bear, and a market that for now more than a year has single handedly been led by this one man.

What he will say at this crossroads therefore may too be historic as both the market and the public tries to make sense of these events.

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• Source: https://www.trustnodes.com/2023/03/20/fed-increases-global-liquidity