Global Market | |
Global Market | |
1153 VIEWS | |
![]() | |
PROSHARE | |
PROSHARE |
Monday,
March 16, 2020 /06:20 AM / By Federal Reserve /
Header Image Credit: USA Today
The Federal Reserve is carefully monitoring credit
markets and is prepared to use its full range of tools to support the flow of
credit to households and businesses and thereby promote its maximum employment
and price stability goals. In addition to actions taken by the Federal Open
Market Committee, including actions taken in coordination with other central
banks, the Federal Reserve Board announced a series of actions in support of
these goals. These actions are summarized below.
Discount Window
Federal Reserve lending to depository institutions
(the "discount window") plays an important role in supporting the
liquidity and stability of the banking system and the effective implementation
of monetary policy. By providing ready access to funding, the discount window
helps depository institutions manage their liquidity risks efficiently and
avoid actions that have negative consequences for their customers, such as
withdrawing credit during times of market stress. Thus, the discount window
supports the smooth flow of credit to households and businesses. Providing
liquidity in this way is one of the original purposes of the Federal Reserve
System and other central banks around the world.
The Federal Reserve encourages depository institutions
to turn to the discount window to help meet demands for credit from households
and businesses at this time. In support of this goal, the Board today announced
that it will lower the primary credit rate by 150 basis points to 0.25 percent,
effective March 16, 2020. This reduction in the primary credit rate reflects
both the 100 basis point reduction in the target range for the federal funds
rate and a 50 basis point narrowing in the primary credit rate relative to the
top of the target range. Narrowing the spread of the primary credit rate
relative to the general level of overnight interest rates should help encourage
more active use of the window by depository institutions to meet unexpected
funding needs. To further enhance the role of the discount window as a tool for
banks in addressing potential funding pressures, the Board also today announced
that depository institutions may borrow from the discount window for periods as
long as 90 days, prepayable and renewable by the borrower on a daily basis. The
Federal Reserve continues to accept the same broad range of collateral for
discount window loans.
Intraday Credit
The availability of intraday credit from the Federal
Reserve supports the smooth functioning of payment systems and the settlement
and clearing of transactions across a range of credit markets. The Federal
Reserve encourages depository institutions to utilize intraday credit extended
by Reserve Banks, on both a collateralized and uncollateralized basis, to
support the provision of liquidity to households and businesses and the general
smooth functioning of payment systems.
Bank Capital and
Liquidity Buffers
The Federal Reserve is encouraging banks to use their
capital and liquidity buffers as they lend to households and businesses who are
affected by the coronavirus.
Since the global financial crisis of 2007-2008, U.S.
bank holding companies have built up substantial levels of capital and
liquidity in excess of regulatory minimums and buffers. The largest firms have
$1.3 trillion in common equity and hold $2.9 trillion in high quality liquid
assets. The U.S. banking agencies have also significantly increased capital and
liquidity requirements, including improving the quality of regulatory capital,
raising minimum capital requirements, establishing capital and liquidity
buffers, and implementing annual capital stress tests.
These capital and liquidity buffers are designed to
support the economy in adverse situations and allow banks to continue to serve
households and businesses. The Federal Reserve supports firms that choose to
use their capital and liquidity buffers to lend and undertake other supportive
actions in a safe and sound manner.
Reserve Requirements
For many years, reserve requirements played a central
role in the implementation of monetary policy by creating a stable demand for
reserves. In January 2019, the FOMC announced its intention to implement
monetary policy in an ample reserves regime. Reserve requirements do not play a
significant role in this operating framework.
In light of the shift to an ample reserves regime, the
Board has reduced reserve requirement ratios to zero percent effective on March
26, the beginning of the next reserve maintenance period. This action
eliminates reserve requirements for thousands of depository institutions and
will help to support lending to households and businesses.
Coordinated Central Bank
Action to Enhance the Provision of U.S. Dollar Liquidity
The Bank of Canada, the Bank of England, the Bank of
Japan, the European Central Bank, the Federal Reserve, and the Swiss National
Bank are today announcing a coordinated action to enhance the provision of
liquidity via the standing U.S. dollar liquidity swap line arrangements.
These central banks have agreed to lower the pricing
on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so
that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus
25 basis points. To increase the swap lines' effectiveness in providing term
liquidity, the foreign central banks with regular U.S. dollar liquidity
operations have also agreed to begin offering U.S. dollars weekly in each
jurisdiction with an 84-day maturity, in addition to the 1-week maturity
operations currently offered. These changes will take effect with the next
scheduled operations during the week of March 16.1 The new pricing and maturity
offerings will remain in place as long as appropriate to support the smooth
functioning of U.S. dollar funding markets.
The swap lines are available standing facilities and
serve 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, both domestically and abroad.
Related News
Related News - Monetary Policy