Fed, ECB Offer Aid To Global Financial System

Europe

Federal Reserve Chairman Ben Bernanke delivers remarks at the FDIC Forum on Mortgage Lending for Low and Moderate Income Households, Tuesday, July 8, 2008, in Arlington, Va. (AP Photo/Luis M. Alvarez)

(CNN) - Europe's hurting for cash, and central banks around the world are stepping in to give it a boost.

The Federal Reserve, along with five other central banks, acted Wednesday to make it cheaper for banks around the world to borrow U.S. dollars.

The Fed -- along with central banks of the eurozone, England, Japan, Switzerland and Canada -- announced a coordinated plan to lower prices on dollar liquidity swaps beginning on Dec. 5, and extending these swap arrangements to Feb. 1, 2013.

A swap takes place when the Fed provides U.S. dollars to a foreign central bank in exchange for the equivalent amount of foreign currency from that central bank.

Overall, these efforts are meant to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Federal Reserve said in a press release.

World stock markets surged on the news, pushing the Dow (INDU) back into positive territory for the year.

Together, the six central banks also created a temporary mechanism, making it easier for them to exchange their foreign currencies -- not just U.S. dollars. That tool gives any of these central banks easier access to euros, Japanese yen, British pounds, Swiss francs and Canadian dollars should they need those currencies to assist their region's banks in the event of a crisis.

These liquidity facilities could come in handy if Europe's debt crisis, for example, escalates to the point that foreign banks need the funds to continue normal business transactions.

"These swap lines are being implemented as a contingency measure, so that central banks can offer liquidity in foreign currencies if market conditions warrant such actions," the Federal Reserve said in a Q&A about the plan.

Since May, the cost for European banks to borrow dollars from other European banks has skyrocketed. Through central bank auctions announced in September, these banks can borrow dollars at reduced interest rates, for periods of three months.

This is meant to lower the cost of short-term borrowing for troubled European banks, as well as give them immediate access to dollars. Today's actions continue that plan and further reduce borrowing costs.

The European Central Bank is the one actually making the loans, so the Fed is not on the hook if a European bank fails, said Paul Ashworth, chief U.S. economist with Capital Economics.
China starts easing

In its statement Wednesday, the Fed stressed that the move is designed to offer help to foreign banks, and that U.S banks are not in need of liquidity, at least for now.

"U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets," the central bank said. "However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions."

Meanwhile, the People's Bank of China also announced a plan to increase liquidity Wednesday by lowering its reserve requirement ratio for financial institutions by half a percentage point. To top of page


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