Yahoo Finance’s Ines Ferre joins the Live show to explain what swap lines are and to discuss the actions of the Fed and central banks to ensure dollar liquidity amid the U.S. banking crisis.
Video Transcript
- The Federal Reserve and other major global central banks around the world announced that they would work to make sure dollars remain available in an effort to stem any liquidity concerns in the global financial system. But how often does something like this happen? And how does it work? Yahoo Finance's, Ines Ferre, is here to explain it all. Inez.
INES FERRE: Yeah, guys. So the Federal Reserve is now reopening daily swap lines. So what are these? A swap line is basically an arrangement between two center banks to exchange currencies. So let's say the Swiss National Bank says to the Fed, hey, I've got a bunch of Swiss francs, and I need US dollars. So that's the exchange that takes place. Now regularly, the Federal Reserve has this open every seven days. But now it is going to a daily basis. And it's done this before on a daily basis. And I'll explain in a bit.
But there are five central banks that are involved with this. Including the Bank of England, the Bank of Japan, the Bank of Canada, the ECB as well, and the Swiss National Bank as well. So why would they do this? Well, when you have by a banking crisis, banking worries, there are concerns that depositors will want to take money out of banks. And this includes little banks in Europe, for example.
So banks around the world, institutions around the world, many of them hold US treasuries. And those US treasuries are denominated in US dollars. So let's say that a small bank needs to sell some of its US treasuries. It needs to sell those in dollars. And another institution, another bank, may buy those US treasuries. But they may need US dollars. So then they will go to their central bank and say, I need US dollars to buy this. And that's where that central bank steps in and says, yes, we've got US dollars because the Fed is lending us US dollars now on a daily basis.
And basically, what this is doing is trying to calm concerns around the banking crisis. Trying to calm fears. And trying to shore up confidence within the banking community overall. Now the fact that the Fed has done this now on a daily basis, not the only time that it has done this. It's done this back in 2020, March of 2020, where there were liquidity concerns then. And also back in 2008 during the financial crisis. So basically, this is providing liquidity. It just keeps the liquidity going guys.
- Ideally.
INES FERRE: Ideally.
- Ideally. Right? I mean, that's the goal of it.
INES FERRE: Yes.
- It keeps the liquidity going even if it doesn't necessarily keep market confidence in these--
INES FERRE: Right. And you have to take into account, is this the Fed panicking? It depends on who you ask because they will say, well, look they do this on a seven day basis normally. So this is they're just increasing that on a daily basis. But the fact that they announced this on a Sunday, the fact that they announced it before the markets open, you just have to keep in mind that, yes, definitely the Fed is concerned as well as other central banks about this banking contagion going farther.
- Yes. Definitely. Thanks so much, Ines. Helpful to lay that out for us.
