The Eeonomist March 21st 2020~provision for bad loans as the probability of
default rises, rather than waiting until
counterparties start missing payments be-
fore booking losses.
The second problem banks have is their
own scramble for cash. As lenders make
loans, their balance-sheets grow. But bal-
ance-sheet is a scarce resource, especially
in the cunent climate. In o.tder to issue
more loans banks must either shrink other
assets, or find extm capital and funding.
They are doing both. Banks have pulled
back from market-making activity, as evi-
denced by the stubbornly high interest
rates in the "repou market, where firms and
banks can swap cash overnight in ex-
change for posting Treasuries as collateral.
Ordinarily banks might jump atthe oppor-
tunity to arbitrage the difference away by
hoovering up T.reasuries. Yet intermediat-
ing in the repo market is something they
can ill afford at present. Banks are also re-
taining more of their profits in order to
build up capital. on March 15th America's
six largest banks announced they were
baiting share buybacks for three months.
Their backstop is the FedeAI Reserve,
America's lender of last resort. It has gone
outofitswaytoeasetheblockagesinthe:li-
nancial system by encouraging banks to
lend. It started on March u.th when the
New York Fed, a branch of the centAI bank,
made $i.5tm (an ocean of cash) available
for repo operations. In addition to cutting
interest rates on March 15th the Fed an-
nounced it would buy up $5oobn-worth of
T.reasuriesand$2oobn-worthofmortgage-
back2d securities. By taking assets off the
banks' hands, it enables them to expand
lending. It cut the rate on the ·mscount
window", a tool for banks to borrow from
the Fed, and encow:aged them to use it free-
ly. It suggested that banks could dip into
their capital buffers, worth $L9tm, and
their liquidity buffers, another $2.7tm, to
lend to firms and households, which
helped ease their regulatoiy constraints.
Then, on March 18th, the Fed announced it
would start buying short-dated commer-
dal paper, to provide direct support for big
- Junk funk
ICE BofAML US high-yield corpo,..bond
spread ovs ll'easurfes, pen:entage points
'1JXf1 09 11 13 15 17 20
S®n:I!: Fedetlll Reserve Bank of St Louis2520151050companies. It also relaunched a facility to
lend directly to •primary dealers", a group
offinancialfirmsthatdonothavedirectac-
cess to typical Fed lending channels.
These steps are the right ones. Other
centAI banks are taking similar steps. For
banks that promise to lend cash the Euro-
pean CentAI Bank bas cut the rate at which
banks can bonowfromthecentJalbankbe·
low the rate at which they are compensated
for deposits. It says it will also expand itsThe surging dollarFinanee & economics 63bond-buying programme by a whopping
€1sobn ($8l8bn). The Bank ofJapan. mean-
while, is buying up company shares di-
rectly, too.
The scramble for cash will continue. If
enough liquidity is created quiclcly, the
long-term damage to the real economy will
be minimised, though. And if firms know
that they can get cash whenever they need
it, they might not need quite so much in the
first place. Rather like loo paper. •Multi-coloured swap shop
HONGKONG
The Fed is, but does not want to be, the wodd's cientral bankA
MERICA'S CURRENCY' was not always as
coveted as it is in today's troubled
times. In the 196os European centAI banks
had more dollars than they felt comfort-
able holding. To discourage them from
converting their greenbacks into gold, the
FedeAI Reserve introduced its first ·swap
lineN in 1962, allowing foreign centAI
banks to obtain dollars in exchange for
theirowncurrency, thenswapthembackat
a later date. combined with the Fed's pur-
chases of dollars, the swaps helped protect
neIVOUS foreign centAI banks from the
dangers of a dollar devaluation.
ni.e world now faces the opposite pro-
blem: a dollar in high demand, prone to
dangerous appreciation. It has, unsurprls·
ingly, strengthened against the currencies
of emerging markets, which have suffered
brutal capital outflows since late Januaiy
(see chart). But the dollar bas, more sur-
prisingly, also strengthened against safe-
haven CUirencies such as the yen and the
Swiss fr.toe, and pushed currencies like the
pound and the Norwegian krone to their
weakest level in decades. on March 18th
Bloomberg'& dollar spot index, which mea·
sures the greenback against a basket of cur-
rencies, hit an all-time high, its seventh
consecutive rise. Anyone seeking to swap
their yen, fiancs or euros for dollars (and
then swap them back again after a few
months) must pay a premium, known as
the cross-currency basis, which is deduct-
ed from any interest they earn. That pre-
mium has rlsen sharply on several occa-
sions in the past two weeks.
One reason for this scarcity may be the
dollar's global role. Zoltan Pozsar and
James Sweeney of Credit Suisse, a bank,
have pointed out that supply chains are
payment chains in reverse. When the flow
of parts, components and assembly is in-
terrupted, so is the flow of payments in the
other direction. In East Asia, where the- First line of ret...i
CUmulatiw non·rasldant portfolio flows to
emerging m11tcets during global shocks, Sbn
American20-20
quandtatlve-'°"~c=::=:ioo-~•
easing 1C11re Global financial -«>
17 Miy lOU crllis 8 5ep 2008
-60
Covid-19
llj1111 l020 ~Days sinc:.e indicated date
Souroe: IMtitute of lnMational Fill.lnCJepandemic began, these payments are often
made in dollars.
some hospitals oveiwhelmed by co-
vid-19 cases have reported a lull before the
storm, a period when emergency rooms
fall quiet, because people with other ail-
ments are staying away, but the people who
cannot breathe have yet to arrive en masse.
Something similar befell the dollar fund-
ing markets in February. China's shutdown
reduced the need for trade finance, point
out Mr Pozsar and Mr SWeeney, removing
one source of demand for dollar lending.
But as companies' dollar earnings have
dried up, moreofthemhavetumed totheir
banks for help. Companies with pre-ar-
J:anged credlt Unes havedrawn them down.
Large firms that are accustomed to obtain-
ing money directly from the capital mar-
kets, through bonds or commercial paper,
have also tumed to the banks instead.
The banks themselves can tum to the
Fed, which can lend them dollars they can-
not obtain on their own. But the Fed ls less
able to help banks that lack a presence in
America. Last year non-American banks ~