–‘Were Conditions to Deteriorate’ Fed has ‘Range of Tools’ For US Banks

By Denny Gulino

WASHINGTON (MNI) – The Federal Reserve and five other major central
banks Wednesday announced precautionary measures to better supply the
world with dollars and the Fed said it also has “a range of tools” to
amplify liquidity for U.S. financial institutions if necessary.

The Fed said the European Central Bank, the Bank of Japan, the Bank
of England, the Bank of Canada and the Swiss National Bank will pay 50
basis points less if they conduct dollar liquidity swaps, so the new
rate will be the overnight index swap (OIS) rate plus 50 basis points.

The Fed said the six central banks, “as a contingency measure” have
also agreed “to establish temporary bilateral liquidity swap
arrangements so that liquidity can be provided in each jurisdiction in
any of their currencies should market conditions so warrant.”

“U.S. financial institutions currently do not face difficulty
obtaining liquidity in short-term funding markets,” the Fed statement
said. “However, were conditions to deteriorate, the Federal Reserve has
a range of tools available to provide an effective liquidity backstop
for such institutions and is prepared to use these tools as needed to
support financial stability and to promote the extension of credit to
U.S. households and businesses.”

The announcement triggered instant sharp improvements in world
equities markets that were trading and in U.S. equities future prices,
while the dollar sold off sharply along with Treasuries.

The action came well in advance of the end of the year, when
funding pressures already evident could be exacerbated. Market
speculation about easier swap arrangements had been circulating as long
ago as the middle of last month.

The coordinated action by the central banks is “to enhance their
capacity to provide liquidity support to the global financial system,”
the Fed said. “The purpose of these actions is 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 existing swap arrangements have now been extended to Feb. 1,
2013. The lower pricing for swap transfers is effective Dec. 5.

** Market News International Washington Bureau: 202-371-2121 **

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