core sector communique

Federal Reserve, Five Central Banks Act to Lessen Debt Crisis

By Merle David Kellerhals Jr.

Staff Writer

Washington - The U.S. Federal Reserve and five other central banks took coordinated action November 30 to fortify the global financial system and ease strains caused by the European debt crisis.

The coordinated action was announced simultaneously by the Federal Reserve in Washington, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank. The action effectively provides U.S. dollars to foreign banks; they can borrow from their central banks that borrow the dollars from the Federal Reserve at a lower interest rate. The Fed makes the swap in exchange for an equivalent amount of foreign currency from that central bank.

The coordinated action becomes effective December 5 and is extended to February 1, 2013, the Fed announced in Washington.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Fed said in a statement. The U.S. dollar acts as the reserve global currency that underpins the 24-hour-a-day foreign exchange market that links to the flow of global investments.

The Federal Reserve agreed to lower overnight interest rate on currency loans by half a percentage point. The Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank also agreed to continue offering three-month tenders until further notice, the Fed said.

European banks have strained to borrow funds they require to make loans and finance existing debt. The action taken by the six central banks is aimed at helping European banks provide funding where needed as governments implement economic reforms.

The Fed said U.S. banks currently do not face difficulty obtaining money 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," the Fed said.

As an additional measure, the central banks also agreed to establish temporary bilateral arrangements so that funds can be provided in each jurisdiction in any of their currencies should market conditions require it, the Fed said. At present, there is no need to offer funds in nondomestic currencies other than the U.S. dollar, the Fed said, but the central banks "judge it prudent to make the necessary arrangements" so that funds could be put into place quickly.

This action gives the central banks ready access to euros, Japanese yen, British pounds, Swiss francs and Canadian dollars if their banks need the funds.

Federal Reserve Vice Chairwoman Janet Yellen said in a November 29 speech at the San Francisco Federal Reserve Bank that this action underscores the crucial role of strengthened international financial cooperation, saying that the "global economy is facing critical challenges."

The Federal Reserve's Open Market Committee, which determines policy for the central bank system, approved the action. This type of loan arrangement was used by the Federal Reserve from December 2007 to February 2010 with a larger group of central banks.

(This is a product of the Bureau of International Information Programs, U.S. Department of State.)