Fed offers unlimited support
Fed to offer dollars to Bank of England, European Central Bank and Swiss National Bank to lend to private banks.
NEW YORK (CNNMoney.com) -- The Federal Reserve announced Monday it will offer an unlimited amount of dollars to three other central banks in an unprecedented move to provide liquidity to the global banking system.
The U.S. central bank will lend dollars at a fixed interest rate to the central banks of England, Switzerland and the European Union, according to a joint statement from the banks.
The other central banks will be able to borrow "any amount they wish" in exchange for collateral. The goal is to flood the financial system with much-needed dollars.
After they borrow dollars from the Fed, the Bank of England, the European Central Bank and the Swiss National Bank will provide private financial institutions with one-week, 28-day and 84-day U.S. dollar loans in the latest attempt to unfreeze credit.
"The plan allows the central banks to exchange assets on their books for more liquid assets," said John Silvia, chief economist for Wachovia. "It will then allow institutions that need dollars to conduct the business they need to conduct."
The new plan will continue through April 30, and the Bank of Japan will consider introducing similar measures.
"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 statement on its Web site.
With inter-bank lending frozen, and financial institutions unable to acquire short-term money to fund daily operations, central banks have searched for methods to boost liquidity and restore the credit markets to normal operations.
"People have become extremely risk-averse because of the legacy of Lehman Brothers," said Silvia. "If a bank like Lehman can turn over and die in a matter of days, it would be hard to convince banks to lend to other institutions for any given time period."
The latest move follows last week's global coordinated interest rate cuts, as well as Sunday's announcements that European governments will guarantee new bank loans and the British government will invest $63 billion in three major banks.
Monday's plan is the first time in which central banks have issued uncapped loans to other financial institutions. Previously, the Fed had allotted $620 billion in swap arrangements with nine other central banks. That number has ballooned since December, when the Fed announced a $24 billion swap cap only with the ECB and the SNB.
The huge increase in swap funds has been especially necessary during the recent crisis, as banks have become more and more reliant on central banks to provide them with essential loans.
"Before the crisis, central banks were dealing in much smaller numbers, and banks accepted a wide array of collateral and exchanged many different currencies," Silvia said. "Now, the dollar and collateral from central banks is much more highly favored."