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Concerted central bank action - SERIOUS ACTION!

So what’s caused this? Other than the general on-going credit meltdown, of course. On Tuesday, at lunchtime in London and breakfast in New York, the Fed, the Bank of England and the ECB were joined by the Bank of Canada and the Swiss National Bank in launching coordinated bout of liquidity provision. The Bank of Japan and Sweden’s Sveriges Riksbank were taking similar action
In response, stocks rocketed in both London and across the continent, while the dollar gained and gold dropped.

The specific Fed action:

The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.

The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.

The Bank of England action is available here and the ECB statement is here. The Bank of Canada stuff is here, the Swiss version here, Japan’s here and Sweden’s here.

This entry was posted by Paul Murphy on Tuesday, March 11th, 2008 at 12:54 and is filed under Capital markets. Tagged with , , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Mar 19   9:06 Posted by sweden currency [report]

    sweden currency…

    Good post. I am looking into these issues on my blog….

  2. Mar 11   21:10 Posted by fugger [report]

    Anonymous (17.22) has got this right. The securities lending facility allows banks to swap illiquid securities for liquid securities (Treasuries) for a period. They can then use the Treasuries as collateral to borrow cash in the repo market. In the securities lending market, that is called the collateral upgrade trade - very popular in Europe at the moment but not in the US because securities lenders only take cash collateral there.
    Why is the Fed doing that rather than just lending more money via repo of illiquid securities? The answer is balance sheet management. The Fed cant make room for any more term lending on its balance sheet without selling Treasuries outright, which would cause unwelcome permanent changes to its asset portfolio. It also cannot easily expand its balance sheet because it is not allowed by Congress to pay interest on bank reserve deposits (unlike the BoE and ECB). So while the Fed funds rate remains significantly above 0% banks will not want to hold higher reserves.
    The underlying issue is the disappearance of the market for banks to borrow money beyond one week (excepting from people like the Federal Home Loan Banks) following the disappearance of the ABCP market and developments in the money fund sector (all the money has gone into ultra-safe funds). So central banks are intermediating the flow of funds from the overnight market to 1-3 months.
    On the question of whether this is debasing the Fed balance sheet, the key thing is that these are repos with haircuts and daily margining. So the Fed will only lose money if the counterparty fails and the securities default (the Fed can afford to hold until maturity). Also worth bearing in mind that the ECB has always taken these securities in its repo operations and so the Fed is only moving to where the ECB has been since 1999.

  3. Mar 11   18:37 Posted by PC [report]

    Oh dear. I hope Ben and his chums have deep pockets. Does he realise what he’s done? There are two answers to that question: both are profoundly disturbing. If the answer is yes, then that means that tying the fate of the T Bill to that of securitised assets is the lesser of two evils! If the answer is no, then the man is a fool, and is way out of his depth. Both are scary thoughts…

    Anyone care to run a book on which billionaire financier, with an ego the size of a small galaxy, will end up with the epitaph “I broke the Fed in 2008″.

  4. Mar 11   17:22 Posted by Anonymous [report]

    We risk confusing two senses of the word liquidity: (1) Monetary base, and (2) Provision of market-making services to ensure that asset markets remain well behaved and continuous. The Fed has not been doing (1) so far since additions of short-term liquidity have been (partially) sterilised by smaller volumes of permanent repos and a reduction in other parts of the Fed’s balance sheet. But there is no question that the Fed has been adding liquidity in the second sense (2) by repoing securities which have become less liquid (mortgage backed securities) for ones which remain more liquid (US Treasuries)

  5. Mar 11   16:41 Posted by Paul Murphy [report]

    Don’t like to butt in here. However, with all due respect to the other commentrrs, I’m intrigued by jck’s thoughts. Especially given the debate earlier about how much real money the authorities are actually injecting.

    http://ftalphaville.ft.com/blog/2008/03/07/11443/the-fed-rumour-recast/

    What’s the hypothesis? That this is a form of central bank public relations?

    (CBPR - sounds like a business idea.)

    And another question — if equity players consider their first reaction to be wrong (when the footsie is up 150 points), how can it be “right” at 66 points at the close?? Surely these developments call for a binary response.

    FWIW, companions as at delayed lunch today said: “This is about Bear Stearns and their position as key prime broker to more US hedge funds than you could shake a stick at.”

  6. Mar 11   16:16 Posted by bsb [report]

    bear stearns going thru the floor - maybe this move still doesnt help them? are they still bankrupt as was the rumour yesterday?

  7. Mar 11   16:03 Posted by Ranger Turtle [report]

    Bernanke should keep trying to relieve the liquidity crisis in the way they announced today, BUT…

    They need to STOP lowering rates, to fight inflation.

    Food and gasoline prices will exacerbate the poor economy!

  8. Mar 11   15:55 Posted by bsb [report]

    check out this interesting blog post

    http://www.interfluidity.com/posts/1204920896.shtml

    the US banking system is very slowly being nationalised behind the scenes

  9. Mar 11   15:45 Posted by Peter Warren [report]

    (text missing from my comment) and any offers on 800, quite apart from the current “pure” bank solvency crisis and the $500 trillion derivatives debacle waiting in the wings.

  10. Mar 11   15:40 Posted by Peter Warren [report]

    bsb’s 13.35 blog : you’re spot on - They’re scared out of their tiny little minds. If the S&P breaks 1370, the next stops are 1170 (weak), 1090 and

  11. Mar 11   15:21 Posted by VP [report]

    Lol “Even a corpse will spasm..” - will be looking out for that in tomorrow’s FT!

  12. Mar 11   15:14 Posted by Lemmy [report]

    Even a corpse will spasm when a high voltage defibrillator is applied. The problem of insolvency is similar to cancer, it can spread. Dr Bernanke’s moves at boosting liquidity aren’t much use, just postponing the required surgery. You need a clear plan to isolate, contain and work out the bad debts.

  13. Mar 11   15:13 Posted by Andrew Teasdale [report]

    The trouble is this does not flush the proverbial out of the system. Ultimately the Central Banks may be forced to buy the real crap from the banks and then sell this onto an open market exchange (as opposed to over the counter). Once this happens central banks will be better able to influence economic activity through interest rate policy and raise rates if need be.

    We will still be left with the large issue of structural economic imbalances but we will no longer have the intense systematic financial risks which the makes the current crisis one to be feared.

    Andrew Teasdale

    The TAMRIS Consultancy

  14. Mar 11   14:56 Posted by bsb [report]

    the fed’s raison d’etre is to save the big banks. the big banks own the fed (literally, they are the fed’s main shareholders). the fed only cares about the dollar / inflation / the economy / the general public insofar as it cares about the big banks

  15. Mar 11   14:50 Posted by Peter Warren [report]

    While you’re signing cheques Mr Bernanke, I’d like to take my grandmother to Brighton for Easter. I could put up my daughter’s teddybear as collateral if you like. It’s a bit moth-eaten but it’s all we have. Would it be too much trouble to make out the cheque in euros?

  16. Mar 11   14:17 Posted by bsb [report]

    the fed is now fast running out of options. the fact that they are lending out their portfolio of treasuries is indicative of the fact that they don’t want to lend out any more cash than they already are. once the tsy pile is all lent out, what else have they got left to lend?

  17. Mar 11   14:07 Posted by Observer [report]

    When were the official announcements?

  18. Mar 11   13:55 Posted by Alea | Credit Crisis: Fed Reacts [again] [report]

    […] Note this move doesn’t NOT increase liquidity, just like the TAF does NOT increase liquidity. See H.4.1 releases for details Add, related: Concerted central bank action - SERIOUS ACTION! […]

  19. Mar 11   13:51 Posted by apc [report]

    Trying to keep a boat afloat is all about fundamentals, if the storm is severe, the boat is riddled with holes and it is on the rocks, surely it is better to admit there is a huge problem and give everyone on board a fair chance of saving themselves. The enevitable is inevitable and no amount of desparate behaviour is going to change that, there are very few options left. What is happening is not a rescue package it is launching the lifeboats as the main ship is knackered!

  20. Mar 11   13:48 Posted by pooh bear [report]

    i meant perma bears - sorry

  21. Mar 11   13:47 Posted by pooh bear [report]

    whilst i believe banks should be allowed to go to the wall - ie the crock - the idea that citi could go under is actually pretty scary even for us perma bulls

  22. Mar 11   13:44 Posted by pegnu [report]

    as a bonus they also got Spitzer yesterday too :o )

    [/not meant seriously]

  23. Mar 11   13:35 Posted by bsb [report]

    this is becoming a joke

    1. perfect timing so the market can put in a “successful re-test” of the lows from last feb
    2. huge buying this morning before the announcement - this was blatantly front-run by those in the know.
    3. the TAF was supposed to fix this, that wasnt enough so now we have the TSLF, what if the TSLF is not enough
    4. if the Fed is really taking non-agency RMBS as collateral that is the beginning of the end for the Fed. they are already highly leveraged.

  24. Mar 11   13:33 Posted by hedgehog [report]

    looks like Citi or Bears must be going under and this is pre emptive to try and prevent this or avoid complete market collapse on the news.

    If not then recession wise they now know it’s much worse than they thought

    don’t know about slap in the face - oxygen mask and life support seems more appropriate now

  25. Mar 11   13:31 Posted by LDC [report]

    So much for laissez faire…….

  26. Mar 11   13:30 Posted by Bertrand Casalis [report]

    cf Banque de France’s latest Financial stability report, feb 2008 : “Liquidity”, and, specifically, Andrew Crockett’s contributing article.

  27. Mar 11   13:29 Posted by Carlomagno [report]

    But shares are up, look on the bright side… You miserable lot!

    Using Krugman’s analogy, this is the 4th “slap in the face”. Let’s see if it brings the patient back to his senses.

    BTW, BoJ and Riksbank are sitting this one out, like last time. Their statements just offer “support”.

  28. Mar 11   13:25 Posted by DL [report]

    This has to be about rescuing one of the big boys, maybe more than one…

  29. Mar 11   13:19 Posted by Anonymous [report]

    increasingly looks like they are desperately trying to avoid a depression. Very worrying.

  30. Mar 11   13:04 Posted by PC [report]

    I like “The Federal Reserve will consult with primary dealers on technical design features of the TSLF.”

    We’re not making this up as we go along - honest guv!

This post is closed to further comments.