The move, announced Thursday, enables foreign banks to provide dollars to their banks that sometimes lend and trade in US currency. It is the latest effort by the Fed to smooth the functioning of financial markets, as investors, banks, and companies rush to stockpile cash amid plunging stock markets and a sharply slowing economy. Late Wednesday, the Fed also reactivated its third lending facility dating from the financial crisis intended to provide more cash to banks in the form of short-term loans.
The currency swaps established Thursday are capped at $60 billion for six central banks in Australia, Brazil, Mexico, Singapore, Korea and Sweden. The exchange lines are capped at $30 billion for central banks in Denmark, Norway and New Zealand. Under the swaps, the Fed provides dollars for an equal amount of foreign currency, which it can also use in short-term lending to banks if needed.
The Fed already maintains such currency exchanges with five other central banks, including the European Central Bank, the Bank of Japan, and the Bank of Canada. Late Wednesday, the Fed announced its third emergency lending program to provide money to banks that purchase financial assets from money market mutual funds, including short-term IOUs known as commercial paper.
By facilitating the purchase of commercial paper, which is issued by large businesses and banks, the Fed hopes to spur more lending to firms that are seeking to raise cash as their revenues plummet amid the spread of the coronavirus.
This facility, known as the Money Market Mutual Fund Liquidity Facility, is intended to help money market funds unload assets such as commercial paper, but also Treasury securities and bonds guaranteed by mortgage giants Fannie Mae and Freddie Mac.
Money market mutual funds are owned by individual investors in brokerage accounts but also by institutional investors and businesses. Many of the funds have sought in the past two weeks to sell assets to raise cash as investors redeem shares in the funds. Yet with demand for cash rising money market funds have struggled to find buyers for their assets.
The program was established with the support of the Treasury Department, which will guarantee up to $10 billion in loans from the facility.