Dislocations in the Won-Dollar Swap Markets during the Crisis of 2007–2009

During the 2007–2009 international financial crisis, many countries experienced dislocations in their foreign exchange (FX) swap markets and cross-currency swap markets (see Baba et al., 2012).1 When foreign banks’ lending to these countries contracted sharply around the fourth quarter of 2008, domestic banks faced difficulties in borrowing in the interbank market as well as much higher costs in obtaining short-term dollar (or euro/Swiss franc in central and eastern Europe) financing through FX swaps.2 In particular, many of these banks experienced an abrupt drop in gross international claims, which are the sum of cross-border claims in all currencies and local claims in foreign currencies of international banks.3 To ameliorate the dislocations in their FX swap and cross-currency swap markets, central banks in western Europe (Denmark, Sweden, Switzerland, the United Kingdom, and the euro area [for the European Central Bank]), North America (Canada), Asia (India, Japan, Korea, and Singapore), Latin America (Brazil, Chile, and Mexico), central and eastern Europe (Poland and Hungary), and the Pacific (Australia and New Zealand) either used their own foreign reserves or established swap lines with the US Federal Reserve (Fed) or other central banks.