Wednesday, July 23, 2014

Central bank liquidity swaps

These swap lines was initiated by the FED, with the foreign central banks,  in response of  US dollar supply freeze in foreign markets. Fed has Dollar Liquidity Swap Lines and Foreign-Currency Liquidity Swap Lines.
First one to provide the US dollar liquidity to foreign central banks in time of US dollar shortage and second one to get the foreign currency from foreign central banks so that FED can provide the foreign liquidity to domestic banks.
Initially these swap lines were temporary and these came into effect with predefined expiry date but now these swap line have been converted to standing facility. Fed has justified the conversion as below.

The dollar liquidity swap lines were designed to improve liquidity conditions in dollar funding markets here and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress. These swap line arrangements have materially reduced funding pressures in the United States and abroad and thereby proven their capacity to provide an effective backstop and to support financial stability. The foreign currency swap lines provide the Federal Reserve with the capacity to offer liquidity in foreign currencies to U.S. financial institutions should the Federal Reserve judge that such actions are appropriate.
The conversion of these liquidity lines with pre-set expiration dates to standing lines further supports financial stability by reducing uncertainties among market participants as to whether and when these arrangements would be renewed. This action results from the ongoing cooperation among these central banks to help maintain financial stability and confidence in global funding markets.

FED has used the dollar liquidity swap lines multiple times with different central banks since 2008 crisis. It has also releases the FAQ on these swap lines. These swap lines have been used extensively by Federal Reserve as one of the primary responses for 2009 crisis.The FX liquidity lines  went from practically zero to a peak of $582 billion on December 10, 2008. As described in BIS study report Fed bailed out the whole world using these FX liquidity lines.


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