U.S. Fed and other central banks set joint liquidity operation

The U.S. Federal Reserve announced a move with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank on Sunday to boost liquidity in dollar swap arrangements.

"To improve the swap lines' effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily," the Fed said in a statement issued alongside announcements from the other five central banks.

The central banks' joint movement came on the heels of a deal brokered by Swiss authorities to have UBS Group AG to buy rival Credit Suisse Group AG in a historic deal to prevent its disorderly collapse.

That signals the depth of concern central bankers have over the recent turmoil in the financial system on both sides of the Atlantic.

The Fed's foreign exchange swap lines began at 2008 financial crisis.

During the financial crisis, concerns about credit risk and higher demand for liquidity put extraordinary pressures on the global interbank dollar funding market.

Dollar-denominated interbank rates rose sharply and market participants reported little or no interbank lending beyond overnight maturities.

To address U.S. and international funding pressures, on December 12, 2007, the Fed announced the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank.

In the press release in 2007, the Fed indicated that the swap lines, like the Term Auction Facility created at the same time, were intended "to address elevated pressures in short-term funding markets."

Operations will commence on Monday and will continue at least through the end of April, the Fed said.

(With input from Reuters)

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