The Fed's Central Bank Liquidity Swap program is continuing to grow in order to meet the demand for dollar funding in the Eurozone. But in order to replace the funding provided by the dollar commercial paper markets, the Fed has pushed out the average maturity of the facility. Unlike the past couple of months, almost the entire program is now between 2 weeks and 3 months in maturity (as opposed to under 2 weeks), roughly matching the typical term of the CP market. This is meant to complement the ECB's LTRO program to stabilize bank funding.
|Fed Central Bank Liquidity Swap|
The increased, longer-term Liquidity Swap facility is taking pressure off the currency basis swap markets used to convert euro loans into dollar loans (see description of basis swaps). With term dollars available directly from the ECB (via the Fed), for many banks it is no longer necessary to borrow euros and swap into dollars just to fund their dollar assets and dollar businesses. As the chart below shows, the 3m EUR/USD basis swap spread has come in significantly since the worst levels reached in November.
|3m EUR/USD basis swap spread (Bloomberg)|
Again, over time, Eurozone banks are expected to exit their dollar businesses because they can no longer rely on money market funds lending them dollars via the commercial paper markets. This will continue presenting opportunities for US banks who can gain market share by having access to sustainable dollar funding.