Major central banks around the world will cooperate to offer three-month U.S. dollar loans to commercial banks in order to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis.
The European Central Bank said on Thursday it would hold three fixed-rate operations between October and December to provide banks as many dollars as they needed, in order to ease any funding crunch over the year-end.
The European Central Bank has decided, in coordination with the (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 with a maturity of approximately three months covering the end of the year, the ECB said.
The announcement sharply boosted European bank shares and the euro. Shares in French bank BNP Paribas climbed as much as 22 percent from the previous day's close before ending 13 percent higher.
Some banks are finding it hard to obtain dollar funding for periods of longer than a few days as U.S. money market funds and other traditional dollar lenders become increasingly nervous about the threat of a Greek debt default, which could destabilize markets throughout the region. European bank stocks have lost a third of their value since July.
This is a very welcome decision, Silvio Peruzzo, economist at RBS, said of the ECB's announcement.
Market reaction is strong given the news in recent days that some big banks are struggling to get funding. This eases many funding concerns that there are regarding many European banks.
The British and Swiss central banks said they would conduct three-month dollar lending operations simultaneously with the ECB on October 12, November 9 and December 7. The Bank of Japan, which already holds three-month dollar tenders, will add one on October 18.
The Fed, which in the past has faced criticism from lawmakers in Washington for its role in rescue efforts for European banks, will not itself offer three-month loans to banks in the United States. But it maintains dollar swap lines with the ECB and other central banks to ensure they can obtain additional supplies of dollars when needed.
The ECB already offers seven-day dollar loans every week. Two unidentified banks tapped this funding on Wednesday, borrowing a total of $575 million. It was the second time in a month that the facility was used; previously, it had not been tapped since February.
At the height of the global financial crisis in 2008-09, the ECB regularly held three-month dollar operations, before calmer conditions allowed it to phase them out. It held a one-off, three-month operation in May 2010 around the time of Greece's first international bailout.
Bank of France Governor Christian Noyer said this year's three-month dollar operations would buy European banks time as they adjusted their dollar business, which he said was necessary because U.S. money market funds were withdrawing from Europe.
All European banks, and the French are no exception, will have to readjust their activity in dollars, Noyer told France's Les Echos newspaper. They must shrink their balance sheet without at the same time hurting their core businesses, such as export loans.