Central Banks Boost Dollar Liquidity

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By TOM FAIRLESS, TODD BUELL and WILLIAM LAUNDER / September 15, 2011

 

FRANKFURT—Five major central banks moved in concert Thursday to pump dollars into the European banking system by arranging three new funding operations, an action aimed at stemming a new liquidity crisis.

 

The ECB said that it will be joined by U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three U.S. dollar liquidity-providing operations.

 

The action addresses an acute shortage of dollar availability as U.S. lenders withheld funds out of concern that the European banking system is over-exposed to the region's government debt crisis.

 

"They are proactively trying to cover dollar liquidity needs," said Greg Anderson, senior foreign-exchange strategist at Citigroup in New York.

 

The new dollar tenders, under which banks will be able to bid for unlimited funds, will have a maturity of approximately three months covering the end of the year, the ECB said. They will be conducted in addition to the bank's regular funding operations. The tender dates will be Oct. 12, Nov. 9 and Dec. 7, the ECB said.

 

"This comes as good news," amid "increasing signs of tension in dollar funding for euro-zone banks," said Marco Valli, an economist at UniCredit in Milan.

 

The euro rose sharply after the statement was released, and was trading at $1.3824, up 0.49%. The euro was at ¥106.51, up 1.08% and at 1.2057 francs, a 0.08% rise.

 

Shares of French banks soared, with BNP Paribas up 16%, Credit Agricole up 10% and Societe Generale up 9.3%.

 

European banks have lost access to more than $700 billion in U.S.-dollar funding—short-term IOUs and interbank loans—over the past year from U.S. money-market funds and others worried about exposure to troubled European economies, according to J.P. Morgan Chase & Co. and CreditSights research.

 

That has forced the banks to curtail dollar-denominated lending and find dollars far afield, such as in the Middle East. Banks need dollars to fund dollar-denominated loans and other obligations.

 

European banks need the U.S. currency to fund loans they have extended to U.S. companies and consumers. European banks also need dollars to repay past borrowings they made in dollars, such as loans from U.S. money-market funds.

 

On Wednesday, the European Central Bank said two banks had tapped it for $575 million, only the second time in six months the ECB has doled out dollar funding. The names of banks that tap the ECB are kept confidential.

 

"This is basically to address the willingness of American banks to fund European banks," Mr. Valli said. "It looks like American banks do not have full trust to lend dollars to European banks, this is a by product of the sovereign debt crisis."

 

Write to Tom Fairless at tom.fairless@dowjones.com

 

 

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