In response to the “re-emergence of strains in US dollar short-term funding markets in Europe,” today the Federal Reserve reactivated liquidity swap facilities with central banks in the euro area, UK, Switzerland, Canada and Japan. Announced alongside the €750bn support package unveiled by officials in the European Union, banks’ share prices soared.
The Fed’s facility allows foreign central banks to provide dollar-denominated financing directly to local banks. When interbank lending markets seized up during the depths of the credit crunch, the Fed established swap lines with 14 other central banks. At its peak in December 2008, outstanding swaps were worth more than US$580bn, or around 25% of the Fed’s total assets. (This handy primer from the New York Fed, highlighted by Real Time Economics, explains the history and mechanics of the facility.)
The Fed’s facility was launched in December 2007 and closed in February 2010. It will reopen tomorrow and the take-up by central banks will be closely watched. Signs of stress in interbank lending markets suggest that banks are growing more wary of lending to each other, bringing back bad memories from the months following the collapse of Lehman Brothers.