Central Banks Unveil Coordinated Action to Ease Credit Conditions

Wells Fargo’s Mark Vitner on the Federal Reserve and foreign central banks’ decision to launch coordinated activity to provide liquidity.

The Federal Reserve, European Central Bank and four other central banks unveiled a coordinated action to provide liquidity to financial markets in light of strains caused by Europe's debt crisis.

"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 Fed said in a statement.

Essentially, the Fed reducing the cost of providing dollar funding to the other banks in exchange for their respective currencies to "improve liquidity conditions in global money markets," according to the Fed's website.

The swaps are temporary, generally ranging from overnight to three months, and there is a binding agreement to reverse the transaction at a later point, according to the website.

The central banks agreed to lower the pricing on existing dollar liquidity swap arrangements by 50 basis points, bringing the new rate to plus 50 points. As a contingency measure, they also plan on establishing bilateral liquidity swap arrangements in other currencies that could be utilized "should conditions warrant" in the future.

U.S. banks presently "do not face difficulty obtaining liquidity in short-term funding markets," but the Fed said it has tools necessary to provide additional assistance should conditions deteriorate.

As Europe's debt crisis has escalated and began infecting core European economies, concerns have risen that banks may become wary of lending to each other as fears grow over their exposure to sovereign debt that has been beaten down. Similar worries came to fruition after the collapse of Lehman Brothers in 2008, which severely hampered lending among banks across the board, slamming financial markets and contributing to the global economic slowdown.

The other banks involved were The Bank of Canada, the Bank of England, the Bank of Japan, and the Swiss National Bank. The move comes on the heels of the Chinese central bank's cutting of the required reserve ratio on the largest lenders to ease credit conditions there.

Global equity markets soared on the report, with shares of Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) zooming more than 4% to the upside.