Last month, the collapse of Silicon Valley Bank, the second-largest bank failure in US history, unleashed broader panic and raised fears the global financial system would seize up. Now, central banks are signaling that their immediate concerns have eased.
The Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank said Tuesday that they would end daily measures to boost the flow of US dollars to lenders around the world. They cited “improvements in US dollar funding conditions” and “low demand” at recent operations aimed at providing liquidity.
Starting May 1, those operations will once again be held weekly, a decision made in consultation with the US Federal Reserve, the primary source of dollars. The frequency could increase again if needed, the four central banks said.
“These central banks stand ready to readjust the provision of US dollar liquidity as warranted by market conditions,” they said in their statements.
Policymakers sprung into action in March after the collapse of Silicon Valley Bank and Signature Bank in the United States sparked an acute bout of turmoil in the global banking sector. The tumult also nearly took down Credit Suisse (CS), a globally important but troubled bank, forcing Swiss authorities to arrange an emergency sale to rival UBS (UBS).
Hours after the Credit Suisse takeover was announced, the Fed said it would work with central banks in the United Kingdom, Japan, Canada, Switzerland and the European Union to make sure lenders there had access to the dollar liquidity they needed.
That meant making greater use of dollar swap lines, or agreements between the Fed and other central banks to provide dollars in exchange for, say, euros or yen.
Swap lines are a key instrument in central banks’ toolbox aimed at preserving financial stability and keeping credit flowing to households and businesses.
During the 2008 global financial crisis, European banks struggled to obtain US dollars as funding dried up from investors with limited appetite for risk.
Despite the Tuesday announcement, a drop in banking stocks served as a reminder that investors are still jittery about the sector. Europe’s benchmark bank index fell 1.9% in late morning trade. On Monday, the KBW Bank Index, which tracks 24 leading US banks, dipped 0.4%.
Broader US stocks initially fell in pre-market trading Tuesday before posting gains. Dow futures were up 0.1%, S&P 500 futures ticked up 0.2% and Nasdaq futures were trading 0.3% higher.
The declines came after UBS, Switzerland’s biggest bank, posted disappointing first-quarter results on the back of $665 million in legal provisions. UBS’s share price fell by as much as 5% in early morning trade, before paring losses to trade 1.1% lower.. Embattled US regional bank First Republic also said Monday that its total deposits had plunged 41% in the first quarter.
— Anna Cooban contributed reporting.
