The Bank of Israel will supply up to $15 billion in liquidity to the banks from the $130 billion in foreign currency reserves that it has accumulated in recent years. Expanding this program will relieve the shortage of dollars created in the banking system in recent days, a shortage that has pushed the shekel-dollar exchange rate up from NIS 3.43/$ to NIS 3.87/$ yesterday. The exchange rate responded today with its first fall since March 4.
In response to the distress, the Bank of Israel announced on Monday that it was putting into practice a foreign currency swap deals tool vis-a-vis the local banking system for the coming week. The Bank of Israel said today that it would allocate $15 billion vis-a-vis the banking system for swap deals at this stage, including for more than a week.
The Bank of Israel announced, "The Bank of Israel will continue to implement this instrument as long as dollar liquidity pressures continue to be very high. We note that this instrument is operated by using the foreign exchange reserves the Bank of Israel has built up in recent years. The high level of the reserves allows the effective provision of the liquidity to the domestic financial system. This instrument is in addition to the range of tools used by the Bank of Israel in order to attain its objectives: price stability, support for the government’s economic policy, and the stability of the financial system. The Bank of Israel will periodically examine the means of utilizing this instrument and will adjust them as needed, and will continue to adopt, as much as necessary, the range of policy steps that are available to it."
The foreign currency crunch in the banking system has been created by "margin calls" - demands from the banks and financial institutions to increase their collateral for overseas positions - and by purchases of dollars by financial institutions forced to reduce their foreign currency hedges on overseas investments in derivatives, following a steep decline in the value of these investments. A similar phenomenon has been occurring elsewhere in the world in recent days, including the UK, where the pound has been strengthening against the dollar.
Published by Globes, Israel business news - en.globes.co.il - on March 18, 2020
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