Reserve Bank would swap New Zealand dollars for US dollars

Posted by Fraser Trevor Wednesday, 29 October 2008

The US Federal Reserve had established swap lines with other central banks around the world in the past few weeks.The Reserve Bank would swap New Zealand dollars or other currencies for US dollars and lend that to the banks which were charged a margin over a given international rate.The central bank would pass those earnings on to the Federal Reserve so there was no cost to itself, Mr Hannah said.Deputy Reserve Bank governor Grant Spencer said though there was no need to use the facility right now, "it is useful to have this capacity if markets become dysfunctional".The Reserve Bank has introduced other measures to shore up banks' access to funding if international credit lines dry up.In May it announced it would take the banks' prime mortgages as collateral for credit.Two of the big banks - ANZ National and Westpac - have packaged up the prime mortgages in the legal form required by the central bank.The two other large banks are in the process of doing so. The Federal Reserve announced Tuesday that it will supply New Zealand's central bank with up to $15 billion, part of an ongoing effort by the Fed to break through a global credit clog.
Under the new "swap" arrangement, the Fed will provide dollars to the Reserve Bank of New Zealand in exchange for that country's currency. "This facility, like those already established with other central banks, is designed to help improve liquidity conditions in global financial markets," the Fed explained in a brief statement.
The goal is to spur banks and other financial institutions to lend more freely, something that will help the U.S. and global economies.The Fed has set up similar arrangements with the European Central Bank and with central banks in other countries, including Australia, Canada, and Japan.

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