The European Central Bank, the US Federal Reserve (Fed) and some other major central banks have jointly announced that there will be more borrowing opportunities for dollars until at least the end of April. With the measure, the central banks are trying to restore calm to the financial market, which has been restless since the rapid fall of the American Silicon Valley Bank earlier this month.
In addition to the ECB, it will also become easier for the central banks of Switzerland, the United Kingdom, Japan and Canada to borrow dollars from the Fed through so-called ‘swap lines’. Those are dollar borrowing moments that used to take place once a week but until the end of April once a day. This should increase the liquidity of central banks, which in turn can provide regular banks with money. As a result, customers and shareholders need to fear less panic among account holders. The extra lending options also ensure that banks do not hesitate to issue loans to companies and households.
‘This is how capitalism works’
The Silicon Valley Bank went under due to a lack of liquidity; suddenly some of the account holders tried to withdraw money, a so-called ‘bank run’. However, a large part of the bank’s total credit was still tied up in government bonds that the bank could not dispose of quickly enough. US President Joe Biden decided to step in; the federal government guaranteed depositors that they would be able to withdraw all their savings despite the disappearance of the bank. Silicon Valley Bank shareholders, on the other hand, do not see their money back, Biden said: “They deliberately took a risk, and if it ends badly, they lose their money. That’s how capitalism works.”
The financially unhealthy Swiss Credit Suisse also ran into problems, and was bought up on Sunday by former competitor UBS. The American Signature Bank, which had put many of its credits in crypto coins and was losing customer confidence too quickly, was partly taken over by New York Community Bank on Monday morning.
Adding swap lines is a now well-known strategy of the Fed to relieve the global financial infrastructure and calm troubled stock markets. After the credit crisis in 2008 and at the start of the corona pandemic, the US central bank also used the tool to give other central banks the opportunity to make hefty cash injections.
Read also Credit Suisse seems saved: billion-dollar takeover by Swiss bank UBS