The central banks of the world’s biggest developed economies have taken pre-emptive action, to prevent a domino effect of banks collapsing in the event that they find themselves unable to borrow the major currencies they need.
In recent weeks, there has been evidence that major eurozone banks have found it increasingly difficult and expensive to borrow dollars, as huge US money-market funds have become wary of lending to them – because of the widespread perception that the eurozone could be moving from crisis to meltdown.
“You could call the global coordinated initiative an attempt to prevent the current funding difficulties for eurozone banks deteriorating into Credit Crunch ll for the global financial system.”
So the Federal Reserve, the US central bank, has today cut the cost of supplying dollars to the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank. These central banks have in turn pledged to lend whatever dollars are needed by their local banks, at this lowered interest rate.
The central banks have said they will continue to lend dollars to their respective banks in this way until 1 February 2013.
Also, these central banks have put in place contingency arrangements to supply other currencies to their banks, should the need arise.
So, for example, the Bank of England would be able to lend euros to British banks, if these banks were unable to borrow them from commercial financial institutions.
You could call the global coordinated initiative an attempt to prevent the current funding difficulties for eurozone banks deteriorating into Credit Crunch ll for the global financial system.
Investors seem impressed. Share prices, especially the share prices of banks, have risen sharply in markets across the world – on the perception that there has been a diminution in the risk of a return to acute conditions of crisis in banking markets.