Swap lines are “an important liquidity backstop to ease strains in global funding markets”, the Fed said.
To ensure the stability of the global financial system, the Federal Reserve has created a new set of U.S. dollar swaps with five major central banks. This move is aimed at maintaining favorable funding conditions amidst rising concerns about the financial system’s health.
The Federal Reserve announced that it will enhance the frequency of swap lines with the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank. These swap lines will offer access to U.S. dollar funding.
“The network of swap lines among these central banks is a set of available standing facilities and serves as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses,” the Fed stated that, As per a statement released on its website.
After days of uncertainty regarding the financial strength and capital position of Credit Suisse, which is one of the top 20 banks globally, Swiss authorities compelled the bank to sell itself to its local competitor, UBS Group, for roughly $3 billion. Consequently, this prompted the move to increase the frequency of swap lines by the Fed.
In an all-share deal, UBS Group will acquire Credit Suisse for approximately $3 billion. This acquisition values the bank at 0.76 Swiss francs per share, which is a 60% discount to its previous day’s closing price. Moreover, UBS Group will receive a backstop of $9 billion Swiss francs for unrealized losses at Credit Suisse.
According to the Swiss National Bank, the $3 billion acquisition deal between UBS and Credit Suisse includes liquidity support worth 100 billion Swiss francs ($104 billion) for both banks. The aim of this move is to maintain financial stability and safeguard the Swiss economy during this extraordinary situation. Additionally, Switzerland’s Finance Minister, Karin Keller-Sutter, warned that a Credit Suisse bankruptcy would have led to severe repercussions on global financial markets that cannot be reversed.