Central Banks Attempt to Implement Support Programs Without Sparking Panic, Parallels to Past Crisis Linger

Recent measures taken by central banks and sovereign governments are beginning to seem familiar to the early stage actions taken to try and stem financial sector stress in 2007 and 2008. Special liquidity facilities and the boosting of international swap lines, as well as record borrowing by US banks from the Fed’s discount window, are beginning to stagger any resurgence of optimism in international banking systems. Inadvertently sparking fear via measures meant to shore up confidence can play a role in igniting an even worse situation.

Credit Suisse managed to wrangle a buyer in UBS, with significant help from the Swiss government, but several strained US regional banks are still in search of buyers or partners. That will undoubtedly complicate the Fed’s policy path going forward with their next rate decision on deck this week.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

Though central banks and sovereign governments continue their attempts to reassure investors that international banking systems are safe and well-capitalized, it seems confidence has yet to be restored. Moreover, it’s increasingly hard to believe such authorities when their actions are sending concerning signals that seem all too familiar to the great financial crisis just 15 years ago. As famous American author Mark Twain is reputed to have said, “History doesn’t repeat itself but it often rhymes.”

Yesterday, the US Federal Reserve and five other major central banks – the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank – announced coordinated action to boost liquidity in US dollar swap arrangements, typically employed when there’s a squeeze on the availability of USD. That can arise because banks outside the US typically have obligations that are denominated in Dollars and, in times of financial strain, have less access to dollar funding.

The Fed’s March 19 press release, titled “Coordinated central bank action to enhance the provision of U.S. dollar liquidity”, is strikingly familiar to a December 12, 2007 release titled “Federal Reserve and other central banks announce measures designed to address elevated pressures in short-term funding markets”. The 2007 document notes that the Fed would establish exchange swap lines, as well as a “Term Auction Facility” (TAF) to support short-term funding needs and “promote the efficient dissemination of liquidity” by auctioning term funds to depository institutions against their collateral used to secure loans at the discount window. The TAF sounds relatively similar to the ongoing Bank Term Funding Program (BTFP) facility, which will allow banks to take advances from the Fed as a loan for up to a year by pledging Treasuries, mortgage-backed bonds and other debt as collateral.

In the first three days of operation, the US Federal Reserve made loans worth more than $11.8 billion under the BTFP, worth about 47% of the $25 billion in credit protection the Treasury prepared to backstop the program. In addition to that sum, Fed data showed $152.85 billion in borrowing from the discount window in the week ended March 15, a record high, smashing the previous all-time high of $111 billion, reached in the depths of the 2008 financial crisis. In that same week, the size of the Fed’s balance sheet…