How Central Banks Worldwide React on Coronavirus

How Central Banks Worldwide React on Coronavirus

The FINANCIAL -- The federal bank regulatory agencies today released a statement encouraging banks to use the Federal Reserve's "discount window" so that they can continue supporting households and businesses. In South Korea, the central bank cut its benchmark interest rate by 50 basis points in a rare inter-meeting rate.  Australia's central bank, the Reserve Bank of Australia, poured $3.6bn in liquidity into Australia's financial system and said it was prepared to buy government bonds, while the Reserve Bank of New Zealand (RBNZ) slashed interest rates by three-quarters of a percentage point to a record low on Monday following an emergency meeting.

The discount window provides short-term loans to banks and plays an important role in supporting the liquidity and stability of the banking system. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers. Thus, the discount window supports the smooth flow of credit to households and businesses.

Federal Reserve Actions to Support the Flow of Credit to Households and Businesses

The Federal Reserve is carefully monitoring credit markets and is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. In addition to actions taken by the Federal Open Market Committee, including actions taken in coordination with other central banks, the Federal Reserve Board announced a series of actions in support of these goals. These actions are summarized below.

Discount Window

Federal Reserve lending to depository institutions (the "discount window") plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.

A number of top credit card issuers, including Chase, Wells Fargo, Capital One, Citi and U.S. Bank, have posted statements and information on their websites to address customer concerns and promote readiness amid the widespread disruptions caused by the COVID-19 outbreak. Card issuers have also announced emergency support, including credit line increases and heightened fraud security. U.S. Bank is offering “product discounts and other customized solutions,” including lowered interest rates on select loan products, effective Friday, March 13.

The Federal Reserve encourages depository institutions to turn to the discount window to help meet demands for credit from households and businesses at this time. In support of this goal, the Board today announced that it will lower the primary credit rate by 150 basis points to 0.25 percent, effective March 16, 2020. This reduction in the primary credit rate reflects both the 100 basis point reduction in the target range for the federal funds rate and a 50 basis point narrowing in the primary credit rate relative to the top of the target range. Narrowing the spread of the primary credit rate relative to the general level of overnight interest rates should help encourage more active use of the window by depository institutions to meet unexpected funding needs. To further enhance the role of the discount window as a tool for banks in addressing potential funding pressures, the Board also today announced that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis. The Federal Reserve continues to accept the same broad range of collateral for discount window loans.

Intraday Credit

The availability of intraday credit from the Federal Reserve supports the smooth functioning of payment systems and the settlement and clearing of transactions across a range of credit markets. The Federal Reserve encourages depository institutions to utilize intraday credit extended by Reserve Banks, on both a collateralized and uncollateralized basis, to support the provision of liquidity to households and businesses and the general smooth functioning of payment systems.

Bank Capital and Liquidity Buffers

The Federal Reserve is encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus.

Since the global financial crisis of 2007-2008, U.S. bank holding companies have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. The largest firms have $1.3 trillion in common equity and hold $2.9 trillion in high quality liquid assets. The U.S. banking agencies have also significantly increased capital and liquidity requirements, including improving the quality of regulatory capital, raising minimum capital requirements, establishing capital and liquidity buffers, and implementing annual capital stress tests.

These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses. The Federal Reserve supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.

Reserve Requirements

For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework.

In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.

What zero rates, sub-1% bond yields mean for your mortgages, student loans and credit cards. USA Today provided short explanation:

Mortgages

Mortgage rates have dropped to historical lows as bond yields have fallen, a move that could help first-time homebuyers and those looking to refinance. When Treasury yields fall, banks charge lower interest rates for mortgages.

The Fed’s key short-term rate affects 30-year mortgages and other long-term rates indirectly. The average fixed rate for a 30-year mortgage rose to 3.36% last week, up slightly from an all-time low of 3.29% the prior week, according to Freddie Mac. That’s almost a full percentage point lower than 4.31% a year ago.

Student loans

A drop in yields can also affect the interest rates on student loans. For Americans who are headed to college next fall and weighing their financial aid offers, it’s important to separate scholarships from loans that have to be paid back, experts caution.

Australia and New Zealand's central banks join coronavirus fight

Australia's central bank, the Reserve Bank of Australia, poured $3.6bn in liquidity into Australia's financial system and said it was prepared to buy government bonds, while the Reserve Bank of New Zealand (RBNZ) slashed interest rates by three-quarters of a percentage point to a record low on Monday following an emergency meeting.

Currencies of both countries sank following the moves, with the Australian dollar down 0.5 percent to $0.6163 while the New Zealand dollar falling 0.3 percent to $0.6040.

In South Korea, the central bank cut its benchmark interest rate by 50 basis points in a rare inter-meeting rate.

The Bank of Korea has not made a cut through an emergency policy meeting since October 2008, when Asia's fourth largest economy was reeling from the global financial crisis.

The Bank of Korea's policy board cut the base rate to 0.75 percent, the lowest since the bank adopted the current policy system in 1999, a media official said in a text message. The central bank cut rates in July and October last year.


 

Author: The FINANCIAL