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Central bank dollar swap lines and overseas dollar funding costs

Author

Listed:
  • Linda S. Goldberg
  • Craig Kennedy
  • Jason Miu

Abstract

In the decade prior to the financial crisis, foreign banks’ exposure to U.S.-dollar-denominated assets rose dramatically. When the crisis hit in 2007, the banks’ access to dollar funding came under severe duress, with potentially dire consequences for global financial markets that could also spread to U.S. markets. The Federal Reserve responded in December 2007 by establishing temporary reciprocal currency swap lines, or facilities, with foreign central banks designed to ameliorate dollar funding stresses overseas. Drawing on rigorous analysis of the swaps, as well as insights of other economic studies and anecdotal accounts of market participants, this paper concludes that the lines were effective in reducing dollar funding costs abroad and stresses in the money markets. Furthermore, the facilities have been an integral part of the central bank toolbox for managing systemic liquidity disruptions as well as represent an important example of global policy cooperation.> In this paper, authors Linda S. Goldberg, Craig Kennedy and Jason Miu describe the events leading up to the introduction of the dollar swap lines, discuss changes to the facilities as funding conditions evolved and consider the facilities’ effects on market activity. ; Title of Special Issue: Federal Reserve Policy Responses to the Financial Crisis.

Suggested Citation

  • Linda S. Goldberg & Craig Kennedy & Jason Miu, 2011. "Central bank dollar swap lines and overseas dollar funding costs," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 3-20.
  • Handle: RePEc:fip:fednep:y:2011:i:may:p:3-20:n:v.17no.1
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    References listed on IDEAS

    as
    1. Niall Coffey & Warren B. Hrung & Asani Sarkar, 2009. "Capital constraints, counterparty risk, and deviations from covered interest rate parity," Staff Reports 393, Federal Reserve Bank of New York.
    2. Aizenman, Joshua & Pasricha, Gurnain Kaur, 2010. "Selective swap arrangements and the global financial crisis: Analysis and interpretation," International Review of Economics & Finance, Elsevier, vol. 19(3), pages 353-365, June.
    3. John C. Williams & John B. Taylor, 2009. "A Black Swan in the Money Market," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 58-83, January.
    4. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
    5. Nicola Cetorelli & Linda S. Goldberg, 2008. "Banking globalization, monetary transmission, and the lending channel," Staff Reports 333, Federal Reserve Bank of New York.
    6. repec:eee:jbfina:v:83:y:2017:i:c:p:135-152 is not listed on IDEAS
    7. McAndrews, James & Sarkar, Asani & Wang, Zhenyu, 2017. "The effect of the term auction facility on the London interbank offered rate," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 135-152.
    8. Olivier Armantier & Sandra C. Krieger & James J. McAndrews, 2008. "The Federal Reserve's Term Auction Facility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jul).
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    More about this item

    Keywords

    Financial crises ; Banks and banking; Central ; Federal Reserve System ; Dollar; American ; Swaps (Finance) ; Federal funds market (United States) ; Bank liquidity ; Prices ; Auctions ; Financial markets ; Banks and banking; Foreign ; Liquidity (Economics) ; Econometrics;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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