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Did a big European bank come close to failing last night? European banks, especially French banks, rely heavily on funding in the wholesale money markets. Given the actions of the world’s largest central banks last night, it raises the question of whether a major bank was having difficulty funding its immediate liquidity needs.The Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada in a coordinated action moved to provide liquidity to the global financial system.
In a separate move, the Chinese Central Bank cut bank reserve requirements. The People’s Bank of China cut reserve–requirement ratio by 0.5%, the first cut in nearly three years.
The problem was not at U.S. banks as is evidenced by the following excerpt from a statement by the Federal Reserve.
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.These are the type of actions that were being taken during the financial crisis in 2008. Now most knowledgeable experts agree that not rescuing Lehman Brothers was a mistake. The authorities are not about to make the same mistake again. The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known. The readers may want to make their own judgment from the following excerpts from a statement by the Federal Reserve.
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.For a short-term trade, investors may consider buying on dips banks, and broad ETFs. Tickers of interest include, SPY, DIA, QQQ, XLF, EWG, EWU, EWI, BCS, UBS, CS, DB, MS, BAC, C, and JPM.
About Me: I am an engineer and nuclear physicist by background, have founded two Inc. 500 fastest growing companies and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report which publishes four newsletters to help investors profit from change.
Disclosure: My hedge fund and I, as well as subscribers to ZYX Buy Change Alert, may be following this plan and have long positions in the stocks mentioned.
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