On March 30, the Federal Reserve introduced a new temporary FIMA Repo Facility to support the liquidity of Treasury securities held by foreign monetary authorities, an important innovation. Following these interventions, foreign exchange swap basis spreads started moving down almost immediately and within a few weeks reached their levels before the COVID shock.
In a few cases, these unexpected increases in the balance sheet created some pressures on capital ratios, even if the level of capital remained stable. Although bank liquidity management and capital management may be conceptually distinct, recent events illustrate in practice how liquidity management and capital management are intimately related, particularly in times of financial stress.