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On Sunday evening, March 19, 2023, at 5:00 p.m. Eastern Time, the US Federal Reserve, along with several central banks including the Bank of England, Bank of Canada, Bank of Japan, European Central Bank, and Swiss National Bank, announced coordinated action to increase liquidity provision through the arrangement of US dollar liquidity exchange channels. The announcement follows the banking crisis that started with the collapse of three US banks and spread across the world.
Turmoil in the Banking Industry Leads to Coordinated Actions to Increase Liquidity
Before Wall Street opened on Monday and ahead of the Federal Reserve’s next meeting, the US central bank, along with five other major central banks, announced drastic measures to add liquidity to the financial system. Participating banks include the Bank of England, Bank of Canada, Bank of Japan, Swiss National Bank and European Central Bank (ECB). In fact, all participating central banks issued similar press releases regarding the new measures.
“To increase the effectiveness of swap lines in providing US dollar funding, central banks currently offering US dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily,” details the Federal Reserve’s announcement. “These daily operations will start on Monday, March 20, 2023, and will continue until at least the end of April.”
so the central bank literally says of a form –
“Steady boys, mobilize more capital”
— poor sole | $BONK enjoy | 🔥💃 (@DeChDAO) March 20, 2023
The central bank’s latest plans are a popular topic of conversation on social media and forums, as many believe that monetary tightening policy is over. Arthur Hayes, founder of Bitmex, tweeted about the situation, proverb, All is over!!! This [is] what happens when nobody wants to hold USD in a bank that can’t borrow from the Fed using the #banktermfunding program. Not sure how the Fed can raise when handing out dollars to its peers. Cut, cut, cut.”
From Tightening To Loosening
The turmoil in the banking industry started after the collapse of Silicon Valley Bank and Signature Bank. The US Federal Reserve announced plans to make all uninsured depositors from both institutions whole. Shortly thereafter, Swiss banking giant Credit Suisse showed severe signs of weakness and borrowed 50 billion francs from the Swiss National Bank. Swiss authorities then arranged for an emergency takeover of Credit Suisse by UBS, which acquired the financial giant for 3 billion Swiss francs ($3.2 billion).
From the SVB, to the US midsize bank (First Republic), to the global systemic bank (CS), to all the central banks that coordinate…
It escalates quickly
— Mid (@Elmidou) March 20, 2023
Additionally, 11 major US lenders injected $30 billion into First Republic Bank last week. The latest plans by six central banks have the potential to lead to monetary expansion, credit bubbles and more bailouts. By providing liquidity to banks and markets, the major central banks support credit and money creation in the economy. The decision by the US Federal Reserve and other central banks to increase the operating frequency of the 7-day maturity from weekly to daily can be safely considered monetary easing.
“This network of exchange channels between central banks is a fixed set of facilities available and serves as an important liquidity buffer to relieve pressures on global funding markets, thereby helping to reduce the impact of these pressures on the supply of credit to households and businesses. ,” the six central banks detailed in the announcement. Additionally, after Switzerland settled Credit Suisse issues with UBS, Fed Chair Jerome Powell and Treasury Secretary Janet Yellen issued a joint statement saying:
“We welcome today’s announcement by the Swiss authorities to support financial stability. The capital and liquidity position of the US banking system is strong, and the US financial system is resilient. We have been in close contact with our international partners to support implementation.”
What do you think the long-term effect of the central bank’s decision to increase the operating frequency of the 7-day maturity will be on the global economy? Share your opinion in the comments section below.
Image Credits: Shutterstock, Pixabay, WikiCommons
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