JPM Explains The Novel Feature In Today's Fed Liquidity Swap Line Expansion

Tyler Durden's picture

As JPM's Michael Feroli, he move to cut the Fed's swap lines rate from OIS+100 to OIS+50 should not come as a surprise: it was already in the works, the only question is when it would be enacted. As it so happens it was decided on Monday, and was announced today after unfounded rumors of a potential bank failure in Europe became apparent. There was however a twist: "The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today's announcement. The Fed's official statement is that these are being implemented as a "contingency measure." There are no plans to make these operational in the near term, but are apparently being set up as a backup plan in the event of a worsening in global financial conditions." What this means remains unclear but the Fed never changes policy without reason. Which then begs the question: while everyone is focusing on foreign bank lack of USD liquidity, should the real focus be on US bank lack of foreign currency liquidity?

Full note:

The Fed took three actions this morning to support global financial markets: the first and by far most important was lowering the interest rate charged on its dollar liquidity swap lines with the ECB and other central banks from OIS+100bps to OIS+50bps, second it extended the availability of those facilities from August of 2012 to February of 2013, and third it has agreed with other central banks on creating swap lines whereby the Fed can lend foreign currencies to US financial institutions.


Regarding the first of these moves, there had been a fair bit of speculation that the Fed would lower the interest rate charged on these lines, though the timing of such a move was uncertain. Throughout the crises there has been a relatively low hurdle for introducing or making more generous the swap lines, which may be due in part to the fact that such swap lines have historically been considered a normal part of the Fed's toolbox. In addition, the Fed takes no credit risk with these swap lines, as it faces the ECB, not the private European banks that draw on these lines. So from a purely pecuniary view -- which is what is not what is motivating the Fed -- the reduction in the 50bps earned on the lines could be offset by an increase in the amount of risk-free lending done through the swap lines. (We are sometimes asked who is liable to the Fed if the eurozone were to disband. This is not specified in the swap agreements -- which are posted on the NY Fed website -- as seems appropriate given it is still a pretty far-fetched contingency. Presumably the national central banks that comprise the eurosystem would still be liable).


Any increase in usage of the swap lines will result in an increase in reserves held by the US banking system: for European banks that do not have accounts at the Fed, liquidity is provided through US correspondent banks. The fact that the discount rate is 75bps whereas OIS+50 is under 60bps creates some odd optics, as it is cheaper now for European banks to borrow dollars from the ECB than for US banks to borrow dollars from the Fed. The press releases states that "U.S. financial institutions currently do not face difficulty obtaining liquidity" but if conditions deteriorate the Fed has tools which they "are prepared to use," -- which we read as saying a cut in the discount rate is not imminent, but would readily be forthcoming if US banks began to face funding difficulties as well.


The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today's announcement. The Fed's official statement is that these are being implemented as a "contingency measure." There are no plans to make these operational in the near term, but are apparently being set up as a backup plan in the event of a worsening in global financial conditions.


Richmond Fed President Lacker (voting in Plosser's place) dissented. Not too much should be read into this, as he has always had an issue with swap lines, having in the past voted against the long-standing North American lines of $2 billion with the Bank of Canada and $3 billion with the Bank of Mexico.

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Manthong's picture

One World, One Bank, One Supreme Leader.

Momauguin Joe's picture

The octopuss now sits atop the entire globe.

strannick's picture

Like Hank Paulson's bazooka, the liquidity available in foreign currencies will only be available as a contingency.

Like Hank Paulson's bazooka, the liquidity will be drained shortly.

Like Hank Paulsons bazooka, the insiders will know of this event in advance

syntaxattack's picture

There people go again, confusing an octopus and a vampire squid.

Sunset chaser's picture

If the banks have to sell assets in order to cover runs on money, what assets will they sell? Houses or other marked to fantasy items?

That's going to be hard or impossible, because they don't have anywhere near the value of assets they claim they do. In fact, these machinations may ultimately be shown to be efforts to conceal the insolvency of many large banks.

They are on the brink now, and by closing the POMO one must assume the FED is very near the end of the rope it has to play with too. I'm betting collapse sometime in the next six months.

Yikes's picture

You don't get it.  They're doing this specificallly so they DON"t have to sell assets.  To keep the balance sheet illusion going.  This is the ECB saying to the FED " Hey, I'll give you some of my fake money if you give some of your's"  

Chief KnocAHoma's picture

I have been hearing that "Fed is at the end of the rope" or "out of bullets" for five years now.

This will not end well, but it also will not end soon. The disease is rooted deep in the lives of every person in the western world and we all are afraid of the pain we will be forced to endure to end this oppression.

I know people that agree with me 100% that the Fed must end and a new system must be established, until I discuss that when that happens, they will lose the value of their bank holdings.

Then I lose them.

12ToothAssassin's picture

Isnt that a bit like a person keeping 2 checking accounts at different banks and writing checks to themselves daily and using the money during the 'float' time between deposit and cashing of said checks? It works for a while, then its a Felony. Unless youre a banker.

SmoothCoolSmoke's picture

Fed on the brink anytime in the next 6 to infinity months.   Hey I'm short....and I cannot count the "brinks" since I went short.

economics1996's picture

Banking fiascos take three to five years.  Look for a collapse in 2012 or 2013.  We are missing the main lesson here, the Fed is doing an incredible juggling act and we should marvel at the talent of these PhD's as they juggle six, seven, eight plates up in the air without a fall.  It will end soon enough; in the meantime enjoy the show.

Ancona's picture

That translates to "We kicked the fucking can down the fucking road, and all you bastards get to pay for it. Now shut up and get back to work"

IndicaTive's picture

I'd like to plug back in to the Matrix now please.


Falcon15's picture


hedgeless_horseman's picture



The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today's announcement.

Let's all lash our boats together, that way if one of them sinks...

kralizec's picture

That shared misery crap really torks me off!

hedgeless_horseman's picture



Synchronized of the future.

AldoHux_IV's picture

In an era where CB morons want to inflate the debts rather than deal with them in an adult manner, it becomes a race to the bottom in terms of currency so this 'I scratch your back you inflate my $' shit can only work for so long because it's not a solution nor will it help in dealing with the solvency issue.  It's another form of a 'controlled default' slowly but surely.

End the fed, other CB's, the IMF, and the Worldbank they continue to be cancerous upon the real economy and society at large.

Joe Sixpack's picture

Mutually Assured Destruction of Federal Finances = MADOFF

Irish66's picture

should the real focus be on US bank lack of foreign currency liquidity?  absolutely

King_of_simpletons's picture

Your junk for our junk. It's all in perception management.

The Axe's picture

I getting very confused Buckwheat

JS1234's picture

Well I'm sure the Europeans will be very appreciative of us saving their asses and be very respectful to the US just like they have been for WWI, WWII, the Marshall Plan, and the Cold war.

CvlDobd's picture

iPath needs to get going on a corruption ETN

Jonas Parker's picture

Like swapping Puffs for Kleenex - look out for the snot on your hands...

max2205's picture

Good thought TD. This could be the hail Mary pass without anyone in or knowing where the end zone is....

Bansters-in-my- feces's picture

...Long story made short...= " we've been jewed"

midgetrannyporn's picture

Mark assets to fantasy - check

Copious liquidity - check

Sell bonds, buy stocks - check

Squeeze shorts - check

Conjure earnings? - oops


Skittish Toombs, very skittish. [/Riddick]

willien1derland's picture

Or perhaps this may be related to FX Derivative positions - Morgan Stanley (per the OCC latest report) had a HUGE FX Derivative exposure - Perhaps this was needed for rebalancing?

It is a GREAT POST TD - Totally agree with the author - The FED always has a reason if it modifies policy...although I can't shake this dark forboding...I have my own idea of the magnitude of the financial crisis which is ever expanding...I now capitulate my position as I am overwhelmed...the issue MUST be far greater than I could ever perceived...if ANYONE could offer their perspective on a workable value of exposure it would be greatly appreciated...Many thanks in advance

Lazarus Long's picture

the size is everything everywhere. my gut feeling is that the world blew up in 08, and the the CB are trying everything they can. the reason is that they are building a legal case so that the people don't hang them literally.

fbrothers's picture

Something is going to explode. Or, maybe implode.

Dr. Engali's picture

A big bet was placed yesterday on BAC.

Dick Darlington's picture

The night of the living dead. Zombie banks everywhere as far as the eye can see.

Caviar Emptor's picture

The banks must be in Some Hole! 

SheepDog-One's picture

Hey JP Morgan, go fuck yourselves!

sudzee's picture

CB's readying a fix rate for coversion to new worlwide currency.

Stoploss's picture

I guess it's just me, but no one seems to realize that there is a shortage of 'dollars'. EU banks dumping euro's and gold to buy the dollar, guess what, short term supply issue right now with dollars, there aren't any. Hence, overnight EU bank failure, drop the swaps today, and oh yeah, go ahead and cancel that repo, there isn't any liquidity available to remove.. Is it sinkin' in?

hedgeless_horseman's picture



...short term supply issue right now with dollars, there aren't any..

"We can fix that," says Bernanke and Geithner.

sleepingbeauty's picture

We've been printing like maniacs for 3 years and still not enough. Fire up the ludicrous speed printers.

wang's picture
wang (not verified) Nov 30, 2011 2:16 PM

as I type   SPX +39.47 /  notwithstanding  a 200k jobs number friday how soon before this is given back 

good el erian reaction from Bbg this am

equity_momo's picture

*channels Trav7777*


JFC , these sellside asshats are clueless. There is a lack of currency liquidity per se. Whether thats dollars , euros , yen , pounds or malaysian fuckin ringits.



Ergo , the BIS get their minions together and tell them to make available whatever peice of shit paper is needed for whatever piece of shit bank needs it to prevent whatever piece of shit society thats unfolding from unfolding. And its a big fail because 7 billion useless eaters have outgrown the host. And oils over 100. /whatever

slaughterer's picture

Hey Feroli Fonz-meister, you forgot one thing: Whoever borrows from this swap facility is branded with a stigma which reads "Short Me, Now."

12ToothAssassin's picture

Only if they are known by name...