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A review on new central bank liquidity measures- FED, ECB, BOE What’s next?

By Amarendra Bhushan for CEOWORLD Magazine Updated:October 13, 2008

When the history books are written about this crisis, people will just shake their heads with amazement and either laugh or cry. Unlimited money for banks, my goodness. Unlimited dollar liquidity lending? Easy credit got us into this mess, how does offering unlimited liquidity solve the problem? Appropriate collateral? What does that mean? What happens when XYZ Bank Holdings doubles up using this appropriate collateral and still defaults before the 84 day maturity? Hyperinflation?

The Swiss National Bank, the US Federal Reserve, the European Central Bank and the Bank of England issued a joint statement on Monday saying they would lend as much US dollar liquidity as commercial banks needed in a bid to ease frozen credit markets.

The banks said they would meet all bids from commercial banks at a fixed interest rate. The central banks will offer seven-, 28- and 84-day U.S. dollar funding at fixed interest rates that are set in advance of each operation. “Counterparties… will be able to borrow any amount they wish against the appropriate collateral,” all five central banks said in a statement. Central banks will continue to work together amid the financial crisis and are prepared to take “whatever measures are necessary” to provide sufficient liquidity, the statement said.

“Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets,” the statement said. “Central banks will continued to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets,” the statement said.

To accommodate the operations, the Federal Reserve said it will increase the sizes of its temporary currency swap facilities “so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.”

It comes after weekend meetings in Washington and Paris, where policymakers agreed to steady the credit situation. In the statement, the Bank of Japan said it’s considering the introduction of similar measures. “Central banks will continued to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets,” the statement said. The ECB, the BOE and the Swiss National Bank “can provide U.S. dollar funding in quantities sufficient to meet their demand” into 2009, the Fed said today. “Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short- term funding markets.”

All of the previous dollar swap arrangements between the Fed and other central banks were capped. Today’s “action is unprecedented,” said Neil Mackinnon, chief economist at ECU Plc in London and a former U.K Treasury official. Komileva said it may have a “bigger impact” than last week’s rate cut “in terms of practical impact on dollar libor globally.”

The Bank of England, ECB and SNB will conduct tenders of US dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for any amount requested against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the Bank of England, the ECB, and the SNB will be increased to accommodate whatever quantity of US dollars.

The first Bank of England tender will take place on Wednesday 15 October for settlement on Friday 17 October and maturity on Friday 24 October. The new fixed-rate tender for one week dollars replaces the previously announced one-week variable rate dollar auctions, the UK central bank said. The Bank of Japan will be considering the introduction of similar measures, according to a statement.

Nice that they have “unlimited funds” – the true world of Micky Mouse finance – keep printing it! I think Europe just decided to drive a stake in the dollar to kill it once and for all.

How about they insure all long traders? We can buy whatever we want and can’t lose?

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