To fight financial crisis, Fed, central banks boost “swap lines” 

In response to a string of bank failures in the United States and Europe, the Federal Reserve of the United States has launched a coordinated effort with five other central banks aimed at maintaining the stability of the U.S. currency.

The decision by the U.S. Federal Reserve on March 19 comes just a few hours after the Swiss bank Credit Suisse was acquired by UBS for over $2 billion as part of an emergency plan devised by Swiss authorities to protect the country’s financial stability.

According to the Federal Reserve Board, a strategy to improve liquidity circumstances would be implemented through “swap lines,” a currency exchange arrangement between two central banks.

Before the global financial crisis of 2007–2008 and the reaction to the COVID-19 pandemic in 2020, the Federal Reserve used swap lines as a quasi-emergency measure.

Federal Reserve-initiated swap lines are intended to increase dollar financing market liquidity under difficult economic circumstances.

The central banks now conducting U.S. dollar operations have agreed to raise the frequency of seven-day maturity operations from weekly to daily, the Federal Reserve said in a statement.

Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank will be part of the swap line network. It will begin on March 20 and go until at least April 30.

The move also coincides with a dismal prognosis for the U.S. banking industry, with the collapse of Silvergate Bank and Silicon Valley Bank (SVB) and the purchase of Signature Bank by the New York District Financial Services (NYDFS).

In its statement, the Federal Reserve made no direct allusion to the current financial crisis. Instead, it said that the swap line arrangement was developed to increase the availability of credit to consumers and businesses:

“The network of swap lines among these central banks is a set of available standing facilities and 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 most recent Fed statement has prompted a discussion about whether or not the arrangement represents quantitative easing.

Danielle DiMartino Booth, an economist from the United States, stated that the agreements are unconnected to quantitative easing or inflation and do not “loosen” financial conditions.

The Federal Reserve has been striving to prevent the financial crisis from escalating.

The Federal Reserve established a $25 billion financing program last week to guarantee that banks have adequate liquidity to meet client requirements despite difficult market circumstances.

186 U.S. banks are in danger of bankruptcy, according to a new review by many economists on the SVB failure:

“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.”