Central banks reveal co-ordinated response to liquidity crisis

Plunging market confidence in the wake of the bankruptcy of Lehman Brothers and the rescue of insurance firm American International Group has exacerbated severe liquidity shortages in recent days.

Today, the Federal Reserve Bank of New York, the European Central Bank (ECB), the Bank of England, and the central banks of Canada, Japan and Switzerland announced co-ordinated measures to improve liquidity conditions.

The Federal Open Market Committee authorised a $180 billion expansion of the Federal Reserve's swap lines, intended to help the provide dollar funding for both short-term and overnight liquidity operations by the other central banks.

These larger reciprocal currency arrangements could double the ECB's ability to provide dollar liquidity, from $55 billion to $110 billion, while raising the Swiss National Bank's ability by $15 billion to a possible $27 billion. Additionally, new swap facilities authorised with the Bank of Japan, Bank of England and Bank of Canada could see the provision of dollar liquidity in amounts of up to $60 billion, $40 billion and $10 billion, respectively.

All of these currency arrangements have been authorised until January 30, 2009.