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.



) - 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.

Many Large U.S. banks were building on earlier gains in afternoon trading, with

Morgan Stanley

(MS) - Get Report

up over 7% to $14.25.

JPMorgan Chase

(JPM) - Get Report

was up over 6% to $30.39, while


(C) - Get Report

was up 6% to $26.66, and

Bank of America

(BAC) - Get Report

gave bank some of earlier gains, with shares up 2% to $5.19.

White & Case Partner Ernie Patrikis -- a former GC, COO, First VP of the New York Federal Reserve and Deputy GC and alternate member of the Federal Open Market Committee -- said the central banks' "action announced today should help address concerns many have about Europe's falling dominos and the risk of foreign bank liquidity problems leading to financial problems for larger US banks," adding that "banking depends on confidence, and this action will give an additional boost to the financial markets. The Fed already has an unlimited swap line with the European Central Bank."

KBW analyst Frederick Cannon said in a report that "despite the recent funding pressures in Europe, the

European Central Bank has not used its current swap line with the Federal Reserve ($1.5 billion outstanding) due to the stigma associated with using the lines and due to the costs." Cannon added that although the coordinated action by the central banks "should relieve funding pressures on European central banks," the action "does not address the larger issues of sovereign and bank solvency in Europe and does not imply that the Germans are yet ready to support ECB quantitative easing."


Written by Philip van Doorn in Jupiter, Fla.

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Philip van Doorn


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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.