The Fed Serves Another Round: Gives Banks a Shot of Liquidity to Fight the European Blues

The Federal Reserve managed to provide bank stocks a much needed shot in the arm through its decision to team-up with several other central banks – substantially alleviating the symptoms of the rapidly spreading “European debt flu” among investors. The Fed released a statement Wednesday detailing its joint effort with The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to ensure that there is sufficient liquidity in the global financial system. ^[1] The promise held by this collaboration among the world’s largest central banks sent investors into a buying frenzy for the first time in months, with the shares for all banks adding at least 7% to their value over trading yesterday. Shares of Morgan Stanley (NYSE:MS), RBS (NYSE:RBS), BCS (NYSE:BCS) and Deutsche Bank (NYSE:DB) climbed the most to end nearly 11% higher.

See our full analysis for RBS | Morgan Stanley | Barclays

The central banks agreed to reduce the price of U.S. dollar liquidity swap arrangements by 50 basis points (0.5%) to make funds available to them at a cheaper rate in times of a crisis. All the central banks have also entered into separate bilateral liquidity swap agreements with each other so that they can exchange currency directly among each other without the need to make conversions into an intermediate currency if needed.

The Fed explains that this agreement would help reduce the building pressure on the economic environment, as it should facilitate availability of funds for loans to individuals and businesses to “help foster economic activity” even in adverse global economic situations.

Although there are doubts among economists about the actual impact this agreement will have on the world-wide financial system in the long run, no one can deny the fact that this accord reached among the major central banks is the first major step towards an alliance by the world’s biggest economies to fight a deteriorating European debt situation.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

1. Federal Reserve statement on financial liquidity measures, Reuters, Nov 30 2011 [↩]