SEPTEMBER 15, 2011
Effort to Supply Dollars to Banks Resumes
By TOM LAURICELLA
wsj.com
The announcement that central banks are coordinating to help European banks borrow U.S. dollars is a return to a tool employed to help stabilize the banking system during worst of the financial crisis.
As financial strains deepened in late 2007, and banks had trouble finding dollars, the Federal Reserve opened up dollar-lending programs with other foreign central banks. When European troubles caused new stresses in short-term funding markets last year, the credit lines were re-opened. Those lines expired last month.
The effort this time around is being led by the European Central Bank with an apparent focus on ensuring European banks have access to dollars at the end of the year. That's a time when even in normal conditions it can be tough for banks to borrow because holders of cash like to keep money on their books for year end.
In recent weeks there have been signs that banks have been finding it harder to borrow U.S. dollars as worries deepen about their exposure to European sovereign debt and money-market funds ratchet back their lending. As a result, analysts believe the ECB is trying to head off a financing squeeze before it becomes too disruptive.
Here's how it works: The Federal Reserve provides dollars to foreign central banks and, in return, receives an equivalent amount of that bank's currency. This is done through a swap and based on the exchange rate at the time of the transaction. That swap later gets reversed at the same exchange rate. When a central bank draws on its swap line, it pays interest to the Fed.
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The dollar loans "will surely do something to relieve the stresses" seen in the lending markets of late, Mr. Lynch said. However, he added, the bank lending strains are a "symptom" of the European sovereign debt crisis, "not the cause."
Full story: http://online.wsj.com/article/SB10001424053111904491704576572962666879004.html
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