Major Central Banks Take Further Steps To Boost Liquidity Amid Covid-19 Shock
21 March 2020 - 12:05AM
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The US Federal Reserve on Friday announced a coordinated action
with other five leading central banks to further boost the US
dollar liquidity through swap facilities as the spread of the
coronavirus, or Covid-19, pandemic and the consequent economic
shock, triggered recession fears that are rattling markets. The
Bank of Canada, the Bank of England, the Bank of Japan, the
European Central Bank and the Swiss National Bank are part of this
move. The six central banks agreed to increase the frequency of
7-day maturity operations from weekly to daily to improve the US
dollar liquidity swap lines' effectiveness. These daily operations
will commence on Monday, March 23 and will continue at least
through the end of April, the banks said in a joint statement. The
central banks also will continue to conduct the weekly 84-day
maturity operations.
The swap lines among these central banks are 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, both domestically and abroad, the central banks
said.
On Thursday, the Fed said it will extend U.S. dollar liquidity
arrangements with the Reserve Bank of Australia, the Banco Central
do Brasil, the Danmarks Nationalbank, the Bank of Korea, the Banco
de Mexico, the Norges Bank, the Reserve Bank of New Zealand, the
Monetary Authority of Singapore, and the Sveriges Riksbank.
These new facilities will support the provision of U.S. dollar
liquidity in amounts up to $60 billion each for central banks of
Australia, South Korea, Brazil, Mexico, Singapore and Sweden.
The swap lines with the Danmarks Nationalbank, the Norges Bank,
and the Reserve Bank of New Zealand will amount up to $30 billion.
Separately, the European Central Bank and Danmarks Nationalbank
reactivated a swap line and increased the maximum amount to be
borrowed by Danmarks Nationalbank from EUR 12 billion to EUR 24
billion. The facility will remain in place for as long as needed
and was reactivated for Danmarks Nationalbank to provide euro
liquidity to Danish financial institutions.
The ECB's supervisory arm also came out with relief measures for
euro area banks on Friday. The central bank gave banks further
flexibility in prudential treatment of loans backed by public
support measures. The central bank urged banks to excessive
procyclical effects when applying the IFRS 9 international
accounting standard and activated capital and operational measures
announced on March 12. The ECB said the capital relief for banks
total EUR 120 billion that could be used to absorb losses or
potentially finance up to EUR 1.8 trillion of lending for
businesses and households that need support at the time of this
pandemic. The Bank of England on Friday said it has decided to
cancel the 2020 annual stress test for the eight major UK banks and
building societies, among other measures. The move is intended to
help lenders focus on meeting the credit needs of households and
businesses at a time of crisis. Further, the bank said the
Financial Policy Committee and the Prudential Regulation Committee
expect that all elements of banks' capital and liquidity buffers
can be drawn down as necessary to support the economy through this
temporary shock. The central bank observed that the recent 2019
stress test showed that the UK banking system was resilient to deep
simultaneous recessions in the UK and global economies that are
more severe overall than the global financial crisis, combined with
large falls in asset prices and a separate stress of misconduct
costs.
Elsewhere in Europe, Sweden's central bank said it has decided
to buy covered bonds. The Riksbank had earlier decided to extend
its purchases of securities during the year by up to SEK 300
billion.
The purchases will if necessary include government and municipal
bonds, covered bonds and securities issued by non-financial
corporations, the bank said on Friday.
The Riksbank purchased nominal government bonds worth roughly
SEK 2.5 billion on March 18. On March 25, the bank plans to
purchase covered bonds issued in Swedish kronor by Swedish
institutions to a nominal amount of SEK 10 billion.
"The Riksbank is following developments closely and stands
prepared to take further measures and provide the liquidity that is
needed," Governor Stefan Ingves said earlier on Friday, after the
bank auctioned SEK 100 billion in 2-year loans to banks at the repo
rate, which is now zero.
All indications suggest there is good liquidity in the Swedish
banking system, the Riksbank chief said. "All of the Riksbank's
tools can be put to use," Ingves added.
Norway's central bank lowered its key interest rate sharply by
75 basis points at an extraordinary meeting to 0.25 percent.
The Norges Bank had lowered the rate by 50 basis points on March
13. Policymakers did not rule out a further rate cut.
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