Central banks boost flow of U.S. dollars into global financial system

The Federal Reserve and five other central banks—the Bank of England, the Bank of Japan, the European Central Bank, the Bank of Canada, and the Swiss National Bank—announced on Sunday that they would work together to increase the availability of U.S. dollar funding throughout the global financial system.

The move comes as banks on both sides of the Atlantic have come under pressure in recent weeks, with central banks looking to calm concerns about the state of the banking system.

In the U.S., the collapse of Silicon Valley Bank and Signature Bank—and the subsequent intervention of regulators to protect depositors’ funds—prompted a selloff of global banking stocks, with questions lingering around the strength of the American banking sector.

Meanwhile, Swiss lender UBS announced over the weekend that it had agreed to buy troubled rival Credit Suisse in a landmark government-backed deal aimed at assuaging fears around the stability of global banks.

The news of the merger did not land well with investors, however, with banking stocks in Asia and Europe edging downward on Monday while oil prices and U.S. futures also traded in negative territory.

Credit Suisse shares were almost 60% lower by 7:45 a.m. New York time, paring some of their losses from earlier in Monday’s trading session.

How will greater U.S. dollar availability help?

In an announcement on Sunday, central banks said more liquidity would be provided via existing “swap lines.”

Swap lines are agreements between two central banks to exchange currencies. In this case, they are designed to improve global liquidity by giving central banks outside of the U.S. the capacity to deliver U.S. dollar funding to banks within their respective jurisdictions.

The system ultimately allows commercial banks to borrow U.S. dollars directly from their country’s central bank—which in turn borrows from the Fed—rather than on the open market.

The Fed and the Bank of England describe the swap lines as “an important liquidity backstop to ease strains in global funding markets.”

Ordinarily, the swap lines offer U.S. dollar operations on a weekly basis.

The coordinated action announced on Sunday, however, will see banks able to access the dollar funding on a daily basis, with the changes…