Central Banks to the Rescue? What Today's Action Means
By John Carney, CNBC.com Senior Editor
NEW YORK (CNBC) -- The attempt by major central banks to ease strains on Europe's credit markets certainly cheered financial markets on Wednesday, but what does the coordinated action actually do?
In essence, the U.S. central bank, or Federal Reserve, agreed to provide cheaper dollar funding to the European Central Bank-- which can then provide cheaper dollar loans to cash-strapped European banks.
The participation of the central banks of Canada, England, Japan and Switzerland is more of an effort to show that all the central bankers are working together than any expectation that there will be lots of dollar borrowings under their facility.
The goal is to ease the credit crunch in Europe. Lots of European banks make dollar denominated loans, in part because U.S. interest rates are so low. The banks do not usually finance these loans in the way you might think -- by lending out the deposits of their retail customers. Instead, the loans are financed by short-term borrowings from other financial institutions.
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