G7 panel: Central banks need to use range of forex

By Mark Felsenthal

WASHINGTON (Reuters) - A high-level international crisis response body recommended on Friday that central banks of the world's richest economies handle assets in a range of one another's currencies so they can quickly extinguish any financial conflagrations in the future.

The Financial Stability Forum, which includes central bankers and global regulators who have worked on the issues since autumn, recommended steps central banks could take to respond quickly to any crises, such as the current credit crunch that began in the United States and rippled around the world.

The group recommended central banks accept collateral in foreign currencies and across borders to mobilize liquidity around the world.

"When international liquidity distribution is inadequate, coordination between central banks may be useful to provide funds in a foreign currency to banks with international operations where they are unable otherwise to obtain adequate access," the group said.

The recommendations come after the U.S. Federal Reserve cut interest rates repeatedly and opened a series of emergency liquidity facilities to stabilize U.S. financial markets.

Coordinating central bank policies across borders makes sense in an era of increasingly integrated world financial markets, said Ethan Harris, chief U.S. economist for Lehman Brothers in New York. While central banks might disagree on where interest rates should be, they share an interest in smoothly working markets, Harris said.

"They all kind of sink or swim together based on whether the capital markets are working and whether the money market is working," he added.

The forum also suggested that central banks, which have established emergency foreign currency swap facilities with one another to make sure U.S. dollar-denominated assets remain liquid, maintain standing currency swap lines.