Amid renewed financial market turmoil, several of the world’s major central banks, including the Bank of Canada, are re-opening swap lines with the U.S. Federal Reserve Board that were first used to combat the recent global financial crisis.

The central banks of Canada, the United States, Europe, the United Kingdom, and Switzerland, announced Sunday that, “in response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe”, they have re-established temporary U.S. dollar liquidity swap facilities. These new swap arrangements have been authorized through January 2011.

“These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers,” they said.

In particular, the Bank of Canada and the US Fed agreed to re-establish the US$30 billion swap facility (reciprocal currency arrangement) that they allowed to expire February 1 as market conditions at that time no longer warranted it. This revived facility would be accessed, should the need arise, to provide U.S.-dollar liquidity in Canada. “If drawn on by the Bank of Canada, the swap would provide liquidity facilities for use by financial institutions in Canada that are similar in nature to those being announced today by the other central banks,” they said.

“This agreement provides the Bank of Canada with flexibility to address rapidly evolving developments in financial markets,” the Bank said, however it also said it judges that “it is not necessary for it to draw on this swap facility at this time, but that it is prudent to have the agreement in place.”

The arrangements with the Bank of England, the ECB, and the Swiss National Bank will provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. Also, the Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets, they said.

IE