Fed Will Launch New Lending Facility for Foreign Central Banks -- 2nd Update
March 31 2020 - 5:12PM
Dow Jones News
By Nick Timiraos
WASHINGTON -- The Federal Reserve said Tuesday it would launch a
temporary lending facility that for the first time will allow
foreign central banks to convert their holdings of Treasury
securities into dollars, its latest bid to alleviate strains in
global markets.
The program is designed to alleviate stresses in currency
markets that had prompted more foreign central banks to sell their
holdings of Treasurys. The Fed has been aggressively purchasing
Treasury and mortgage securities to reduce market strains, and the
latest move could reduce the supply of those securities hitting the
market if foreign central banks can more easily exchange them for
dollars.
The program could allow around 170 foreign central banks and
other international monetary authorities that maintain accounts at
the New York Fed and aren't subject to U.S. sanctions to enter a
lending arrangement called a repurchase agreement, or repo, in
which borrowers temporarily exchange their Treasury securities for
dollars.
"This facility should help support the smooth functioning of the
U.S. Treasury market by providing an alternative temporary source
U.S. dollars other than sales of securities in the open market,"
the Fed said in a statement.
The repo facility for foreign central banks will be available
beginning April 6 for at least six months.
The latest dollar-lending programs will complement separate
tools the Fed has launched to lend dollars to 14 other central
banks in Europe, Canada, Mexico, Japan, Brazil and Australia to
ensure markets don't run short of currency outside of the U.S.
Many business transactions abroad take place in dollars and
foreign institutions also lend in the currency. The Fed used these
"swap" lines aggressively in 2008 and 2009 during the financial
crisis.
But the latest lending program goes beyond what the Fed employed
during the financial crisis or the 2011-12 eurozone crisis by
making available dollar funding to a far broader cohort of
emerging-market reserve banks. It underscores the growing primacy
of the dollar in global finance and the demands that has placed on
the Fed to serve as a central bank to the world.
The new lending facility is likely to reach a much broader set
of foreign central banks, especially those with acute dollar
demands that don't have Fed swap lines, including in India, China
and Saudi Arabia.
While swap lines essentially allow the Fed to lend against the
currencies of foreign central banks, the latest repo transactions
offer these central banks loans against their holdings of U.S.
Treasurys.
The latest facility should "serve a useful role to assist
smaller emerging markets that need to monetize dollar assets to
lean against excessive exchange-rate depreciation," said analysts
at Evercore ISI in a report Tuesday.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
March 31, 2020 16:57 ET (20:57 GMT)
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