AP, Tuesday 25 Apr 2023
In a sign fears about the global financial system have eased for now, major central banks are scaling back their offer of emergency dollar loans to banks, a crisis step launched after the collapse of Silicon Valley Bank in the U.S. fed fears about wider troubles.
People look at signs posted outside of an entrance to Silicon Valley Bank inSanta Clara, Calif., Friday, March 10, 2023. AP
The European Central Bank said Tuesday that it and other central banks found that pressure on banks’ cash needs has dropped and the crisis credits were not being used much lately.
As of May 1, the central banks will move from daily offerings of dollars to any bank that needs them to the previous availability of every seven days.
Making extra dollars available has been a tool in times of trouble because banks need the U.S. currency to handle many international transactions.
The so-called dollar swap lines were used during the 2008 global financial crisis and the economic turmoil in the early days of the COVID-19 pandemic to ease the impact on the supply of credit to consumers and businesses.
The daily dollar credits are being scaled back “in view of the improvements in U.S. dollar funding conditions and the low demand at recent U.S. dollar liquidity providing operations,” the European Central Bank said in a statement.
The Bank of England, Bank of Japan, and Swiss National Bank were taking the same step in consultation with the U.S. Federal Reserve, the ECB said. It added that the fast dollar credits could be rolled out again if market conditions warrant.
The daily dollar credit window was announced on March 19 before markets opened in Asia — just days after Silicon Valley Bank failed and the same day the Swiss government announced that UBS would take over faltering rival bank Credit Suisse.
The turmoil raised fears that other banks could be destabilized by similar losses that regulators might have overlooked.
Bank shares had plummeted in Europe as concerns spread about wider issues in the global financial system, which ultimately forced the emergency rescue of Credit Suisse as customers rapidly pulled out their money from the long-troubled Swiss bank.
Otherwise, bank shares have since regained some of their losses in Europe, where regulators have imposed tougher rules than other parts of the world requiring banks to hold on to cash to cover deposit withdrawals.
Under the swap lines, the Federal Reserve provides dollars to other central banks in exchange for their currencies, hence the term swap. The central banks in turn can then lend the dollars to banks that might need them so they can keep on helping customers make transactions in dollars, the key currency for global trade.
This article was originally published by The Associated Press (AP).