Fed to Provide Unlimited Dollar Funding Under Swap Facilities

The Federal Reserve in an unprecedented move to provide broad access to liquidity and funding to financial institutions — announced Monday that it will begin providing unlimited dollar funding under its swap facilities with three major European central banks.

The European Central Bank, the Bank of England, and the Swiss National Bank jointly announced that the terms of their respective currency swap arrangements with the Fed have been altered to improve liquidity in short-term U.S. dollar funding markets.

The central banks said they will supply U.S. dollars to provide 7-day, 28-day and 84-day maturities at fixed interest rates for full allotment. Funds will be set in advance of each operation to ensure that the system is fully liquidized.

Counterparties in these operations, notes the Fed, will be able to borrow any amount they wish against the appropriate collateral. Accordingly, swap lines between the Federal Reserve and other central banks will be increased to accommodate ‘whatever quantity’ of U.S. dollar funding is demanded.

The Bank of Japan said in the statement it also is considering lifting its allotment cap. The Fed also has existing swap arrangements with set ceilings with the Bank of Japan, the Bank of Canada, the National Bank of Denmark, Norges Bank of Norway, the Reserve Bank of Australia and the Riksbank of Sweden.

“Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets,” the Federal Reserve said in a brief statement.

The new plan has been authorized to continue through April 30, ’09.

Today’s announcement marks the first time in which central banks have issued uncapped loans to other financial institutions. Eliminating the cap for Europe’s three biggest banks will certainly provide dollar funding in quantities sufficient to meet demand.

Previously, the Fed had allotted $620 billion in swap arrangements with nine other central banks.

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