Global central banks announced coordinated action

Fed, central banks slash dollar borrowing costs

Lower price on dollar swap lines as Europe tensions rise

Global central banks announced coordinated action on Wednesday to shore up liquidity in the financial system as Europe’s banking system showed growing signs of stress.

The moves were announced in statements issued simultaneously by the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the banks said.

The central banks agreed to lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 basis points, putting the new rate as the U.S. dollar overnight index swap rate plus 50 basis points.

The pricing will apply to all operations beginning Dec. 5. Access to the swap lines has been extended until Feb. 1, 2013.

The announcement lifted European equities and triggered a surge by U.S

“The extension of the dollar swap lines essentially means that dollars will be available cheaply and on request for the next 15 months to Europe’s troubled financial sector, which will probably greedily eat them up after being starved of much-needed dollar funding since the summer.”

The ECB said it will regularly conduct U.S. dollar liquidity-providing operations with a maturity of around one week and three months at the new pricing. A schedule for the operations will be released later Wednesday, the ECB said.

The ECB added that the initial margin for three-month U.S. dollar operations will be reduced from 20% currently to 12%.

In the operations, the ECB will effectively meet all requests by institutions for one-week or three-month dollar loans in return for collateral.

The move comes as European banks scrambled to acquire dollars. The cost of swapping euros for dollars via implied one-month cross-currency basis swaps rose to its highest level in three years on Tuesday.

Other indicators of stress in Europe’s interbank market have been on the rise, while the inability of the European Central Bank on Tuesday to fully offset bond purchases in a weekly money-market operation offered a further sign that European banks have been hoarding cash amid worries over the spread of the debt crisis and other factors.

The central banks said they also agreed to establish temporary bilateral liquidity swap arrangements in order to allow liquidity to be provided in each jurisdiction in any of their currencies if market conditions warrant.

“At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise,” the banks said.