By Leika Kihara
TOKYO, Oct 31 (Reuters) - Six major central banks said on Thursday they would make their web of currency swap arrangements permanent as a “prudent liquidity backstop” in case of future global financial strains.
The Bank of Japan, U.S. Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada and Switzerland will convert their “temporary bilateral liquidity swap arrangements” into standing arrangements that “will remain in place until further notice”.
“The existing temporary swap arrangements have helped to ease strains in financial markets and mitigate their effects on economic conditions,” a coordinated statement from the central banks said. “The standing arrangements will continue to serve as a prudent liquidity backstop.”
Currency swap lines were first introduced nearly six years ago in response to a global credit crunch that starved banks of liquidity and threatened to gum up the entire financial system.
They were an important part of the policy response to the 2007-2009 financial crisis, keeping a lid on funding costs which had spiralled due to fear over counter-party risk.
The arrangements were next due for review in February.
Speaking after the BOJ kept its massive stimulus programme in place, Governor Haruhiko Kuroda said the structure had helped bring stability to financial markets and the move to make it permanent did not denote any new alarm about liquidity.
“We decided to make them permanent to avoid uncertainty as they were due to expire next February,” Kuroda told a news conference. “We have no plan to extend the swap arrangements beyond the six central banks.”