Central banks take action to enhance US dollar liquidity amid market turmoil

The ECB, Bank of England and Federal Reserve join with other major central banks to offer seven-day US dollar operations on a daily (instead of weekly) basis, effective from 20 March 2023.  

Bank of England

The European Central Bank (ECB), Bank of England, Federal Reserve and others yesterday announced a coordinated action to enhance the provision of liquidity via standing US dollar liquidity swap line arrangements; in a bid to ease pressure on the funding market amid the current banking turmoil.  

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The Bank of Canada, the Bank of Japan and the Swiss National Bank also joined in a bid to improve the swap lines’ effectiveness in providing US dollar funding by increasing the frequency of 7-day maturity operations from weekly to daily. 

Daily operations commence on Monday, 20 March 2023, and will continue at least until the end of April. 

“The network of swap lines among these central banks is a set of available standing facilities and serves 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,” said the ECB in a statement.  

The Bank of England’s first daily 7-day maturity repo operation ran at 08:15 on Monday 20 March, with bids closing at 08.45. Results of the day’s US dollar repo operations are due to be announced at 10:00 AM daily, or as soon as possible thereafter. The funds will be offered at the US overnight rate plus 25bps.  

The current standing arrangements were put in place in October 2013, following a conversion by the group of central banks of their temporary bilateral liquidity swap arrangements to a permanent agreement. Daily dollar auctions across time zones were last put in place as a liquidity measure during the Covid crisis in 2020.  

“The standing arrangements will continue to serve as a prudent liquidity backstop,” said the Federal Reserve.  

The increased access to US dollar liquidity comes in response to the current market turmoil as multiple bank crises hit the industry, including the collapse of Silicon Valley Bank and the fire-sale of Credit Suisse to UBS on 19 March. Funding markets are expected to experience severe stress this week, especially given the decision to write down the entirety of Credit Suisse’s AT1 debt – to the tune of around CHF16 billion ($17.2 billion).