According to reports, the Federal Reserve in the United States introduced a new, improved dollar swap facility for seven days last Sunday to alleviate the global markets’ funding stress. The Fed aimed to prevent a sudden drop in confidence within the financial system by offering day-to-day currency swaps to banks in Canada, Japan, Britain, the Eurozone, and Switzerland.
Thus, these banks can have the necessary dollars to function. However, global banks only borrowed small amounts on Monday via this new system.
Mitigating Risks Of Financial Market Disruption
In Switzerland, two banks took out $101 million, while a single bank within the Eurozone borrowed $5 million. However, there was no take-up in Japan or Britain.
Previously, the Fed launched the initiative to mitigate the potential risk of financial market disruption in the wake of the coronavirus pandemic. However, the lack of significant borrowing by banks suggests that the immediate funding stress in global markets may not be as severe as initially anticipated.
Central bank swap facilities have existed for many years as part of international cooperation efforts. But, they have yet to see much demand outside of times of acute crisis.
Despite the recent instability in bank shares that posed a risk of broader disaster, the swap lines of central banks have not been heavily utilized. Currently, uptake is less than $1 billion, compared to $446 billion at the onset of the COVID-19 pandemic and an all-time high of $583 billion during the 2008 financial crisis.
In general, banks have had sufficient liquidity for an extended period, and the issue has been one of excess rather than a lack of cash. This is because many banks have held onto more money than necessary.
2 Major European Banks Seek Support From ECB And Fed
According to inside sources familiar with the matter, some central European banks are considering various contagion scenarios within Europe’s banking sector. They seek more precise support signals from the ECB and Fed (Federal Reserve).
This comes in light of the confidence crisis faced by Swiss-based Credit Suisse bank and the two US bank’s failure, which could have further ripple effects on the financial system in the coming weeks. The sources believe that the ECB should highlight the resilience of banks in terms of their liquidity positions and capital.
However, the timing of such statements is a focus of internal deliberations, as there are concerns that they may create further pressure if made earlier than they should have been. Meanwhile, these sources emphasized that the sector and its banks are adequately capitalized with strong liquidity positions.
Nevertheless, they fear that the confidence crisis may spread to other lenders.