UFO - 30.11.2011

Investing | 11/30/2011 @ 9:49AM |22,947 views
Central Bank Intervention Raises Questions
 
Nigam Arora, Contributor 

It appears that a big European bank got close to failure last night.  European banks, especially French banks, rely heavily on funding in the wholesale money markets.  It appears that a major bank was having difficulty funding its immediate liquidity needs.

The cavalry was called in and has come to the successful rescue.

The Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada in a coordinated action moved to provide liquidity to the global financial system.

In a separate move, the Chinese Central Bank cut bank reserve requirements.  The People’s Bank of China cut reserve–requirement ratio by 0.5%, the first cut in nearly three years.

The problem was not at U.S. banks as is evidenced by the following excerpt from a statement by the Federal Reserve.



U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. 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.



U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. 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.

These are the type of actions that were being taken during the financial crisis in 2008.  Now most knowledgeable experts agree that not rescuing Lehman Brothers was a mistake.  The authorities are not about to make the same mistake again.  The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known.  The readers may want to make their own judgment from the following excerpts from a statement by the Federal Reserve.

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. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.



As a contingency measure, these central banks 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. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.



As a contingency measure, these central banks 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. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

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