Central Banks Join Forces to Prop Up Global Financial System

The world’s largest central banks joined forces yesterday, taking coordinated action to inject liquidity into the ailing global financial system. In addition to the U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank all took action to enhance their capacity to support markets sagging with the weight of the euro crisis.

“The purpose of these actions is to ease strains on the supply of credit to households and businesses and so help foster economic activity,” said the Fed in a statement. “These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011.”

In layman’s terms, this lower pricing scheme makes more money available to banks and at a cheaper rate, offering both a fiscal benefit as well as a psychological one, by easing these institutions’ concerns about the availability of funds.

The Fed went on to note its continuing relevance to the health of the domestic and international financial sectors, assuring observers that it has plenty of remaining tricks up its sleeve should things continue to get worse. “U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets,” they 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.”

Markets reacted positively to the move, as the Dow Jones Industrial Average jumped by 400 points immediately after the announcement.

Jacob Barron, CICP, NACM staff writer

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