Central banks to boost flow of US dollars

Following the turmoil in the US banking sector, central banks have taken global steps to keep credit flowing.

Six central banks, including the Bank of England, have announced plans to increase the flow of US dollars through the global financial system.

On Sunday, ailing Credit Suisse was acquired by UBS in a deal backed by the Swiss government.

The US dollar liquidity “swap line” arrangement will run from Monday.

In a statement the Bank of England, Bank of Japan, Bank of Canada, the European Central Bank, US Federal Reserve and Swiss National Bank launched the co-ordinated action to “enhance the provision of liquidity”.

The announcement said it served as an “important backstop to ease strains in global funding markets” and to lessen the impact on the supply of credit to households and businesses.

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Instead of borrowing on the open market, British banks will be able to go direct to the Bank of England, and it will borrow from the US Federal Reserve.

It will work in the same way for banks in the eurozone, Canada, Japan, Switzerland and the US.

Banks will be able to access this funding on a daily basis.

The arrangement, adopted during the 2008 financial crisis and the Covid pandemic, will start on Monday and continue until “at least through the end of April”, the Bank of England said.

Global bank stocks plummeted after the Silicon Valley Bank collapse, despite assurances from President Joe Biden that the US would do “whatever is needed” to protect the banking system.

With the collapse of the SVB, the smaller Signature Bank also disappeared, and the First Republic needed help.

Flagstar Bank, a subsidiary of New York Community Bancorp, has reached an agreement with regulators to purchase assets from US Signature Bank, the US Federal Deposit Insurance Corporation (FDIC) said on Sunday.

This transaction covers almost all Signature Bank deposits, some loans, and all 40 previous branches.

The announcement of “co-ordinated action” by six of the world’s biggest central banks shows how serious is the more general nervousness about the fragility of the global banking system.

The facility has not been used in the UK since financial difficulties hit exactly three years ago at the start of the pandemic. It’s not as dramatic a step as the one the Bank of England had to take after last fall’s mini-budget. But while certain issues with high-profile banks have dominated the past week, the collapse of former giants such as Credit Suisse is a clear sign that it may be enough to stir wider concern.

These concerns have more to do with factors generally affecting other institutions than with the direct impact of Credit Suisse or Silicon Valley Bank problems. For example, thanks to technology and the influence of social media comments, uninsured deposits move from institution to major institution at an astonishing rate, with no one ever visiting the branch. There is also an uncertain response from some regulators.

The bigger picture is, as I have said before, that rapidly rising interest rates were always going to set off some ticking timebombs under some institutions, and in some murky corners of the financial plumbing, where the players had started to become a little too reliant on very low interest rates. This is now happening.

The more calming news is that, for example here, British banks are well capitalised and have significant funding, or as the Bank of England put it on Sunday “safe and sound”. But the fact it has joined forces with its counterparts around the world represents a show of force and an attempt to prevent risks from spilling over.

In particular there is a concern that rising rates on the funds that banks lend to one another could rapidly filter into the economy and have a very real impact.