Central Banks to the Rescue: Banks Rally on Emergency Action

Wells Fargo’s Mark Vitner on the Federal Reserve and foreign central banks’ decision to launch coordinated activity to provide liquidity.

Coordinated action Wednesday morning from some of the world’s leading central banks to make dollars more accessible lit a fire under shares of big banks like Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and Bank of America (NYSE:BAC).

The move triggered a bullish reaction in many markets, sending the Dow Jones Industrial Average racing more than 400 points higher.

The strongest reaction may have been seen in the financial sector, which has been hit very hard at times by the scary European sovereign debt crisis. The decision to lower the price on existing dollar swaps eases fears of funding problems, increases dollar liquidity and reassures those worried policymakers aren’t doing enough to solve the crisis.

Shares of Morgan Stanley (NYSE:MS) surged 7%, JPMorgan Chase (NYSE:JPM) climbed 6% and BofA gained 7%. Goldman saw its stock rise 5%, while Citi leaped 6%.

European banks also rallied, highlighted by a 6.3% gain for Swiss lender UBS (NYSE:UBS) and a 9.1% surge for U.K. financial giant Barclays (NYSE:BCS).

The coordinated action was announced just after 8 a.m. ET by the Federal Reserve, Bank of Canada, Bank of England, Bank of Japan, European Central Bank and the Swiss National Bank.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Fed said in a statement.

The central banks also agreed to extend the dollar swap program until February 2013 and to establish temporary bilateral liquidity swap agreements in order to provide liquidity in each jurisdiction in any of their currencies, if needed.