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Fed, Global Central Banks Take Unified Action to Stoke Credit (Update 3)

Updated with comments from former New York Federal Reserve Bank First VP Ernie Patrikis, KBW, and Morgan Stanley interest rate strategist Jonathan Marymor, and with afternoon market information.

NEW YORK (TheStreet) - Bank stock prices jumped in early trading Wednesday, after the Federal Reserve announced a set of coordinated actions by a group of central banks to "ease strains in financial markets."

The Fed, along with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, 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."

The central banks 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."

The Fed's Open Market Committee also extended its temporary U.S. dollar liquidity swap arrangements with Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013, reducing the rate on the swap arrangements "the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points."

The U.S. central bank went on to say that "U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets," but that the Fed had "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.

The coordinated moves by the central banks had the desired effect of narrowing the spread between the average overnight borrowing rate for European banks to roughly 80 basis points higher than the rate enjoyed by U.S. banks from, 102 basis points, according to Morgan Stanley interest rate strategist Jonathan Marymor, who said the investment bank had "hypothesized that this would be a logical action by the Fed since September."

In another surprise move to stimulate economic growth, China's central bank on Wednesday cut its reserve ratio requirement for commercial banks by 50 basis points, to 21% from a record high of 21.5%, freeing up liquidity for business borrowers.

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