IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The role of currency swaps in the domestic banking system and the functioning the swap market during the crisis

Listed author(s):
  • Judit Páles


    (Magyar Nemzeti Bank (central bank of Hungary))

  • Zsolt Kuti


    (Magyar Nemzeti Bank (central bank of Hungary))

  • Csaba Csávás


    (Magyar Nemzeti Bank (central bank of Hungary))

The basic purpose of this study is to didactically demonstrate the factors shaping the currency swap stock of domestic banks prior to the crisis and to provide a descriptive analysis of how the structure and the functioning of the market changed during the crisis. The main conclusions of the study are as follows. In addition to the wide ranging applicability of the transaction, the rise in the currency swap stock of domestic credit institutions is also attributable to macroeconomic factors. The bulk of the exchange rate risk resulting from the high external borrowing requirement and rising external debt was carried by the domestic private sector, while the foreign sector shared a decreasing portion of the risk. The rapid increase in the swap stock was also due to the fact that the synthetic production of foreign currency funds with currency swaps was often more successful than the direct inflow of foreign currency funds. On the basis of the decomposition of the domestic banking system’s on-balance sheet foreign currency position, we can state that it increased mainly as a result of items that also increased the balance sheet total. Following the outbreak of the global financial crisis in the autumn of 2008, the conditions for ensuring foreign currency liquidity deteriorated significantly, which had a substantial effect on implied forint yields, and the turnover and structure of the swap market. While the total average turnover of the domestic FX swap market did not drop radically when the crisis was spreading, market liquidity did decline significantly for a few days and access to foreign currency liquidity became limited. The active role assumed by parent banks and shortening maturities contributed to moderating the decline in turnover. Anecdotal information relating to the tightening of counterparty limits vis-a-vis domestic banks is supported by the decline in the number of non-resident counterparties. The crisis also contributed to changes in the structure of the swap stock. The average remaining maturity of the gross stock began to decline directly after the Lehman bankruptcy, at the time of global dollar liquidity problems, followed by a rise starting from early 2009, principally owing to transactions concluded with parent banks. Domestic subsidiary banks managed to increase maturity primarily through cross-currency swap transactions concluded with intra-group counterparties, but non-group counterparties also concluded transactions with longer maturity with domestic banks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its series MNB Occasional Papers with number 2011/90.

in new window

Length: 106 pages
Date of creation: 2011
Handle: RePEc:mnb:opaper:2011/90
Contact details of provider: Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mnb:opaper:2011/90. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lorant Kaszab)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.