Ecb Swap Agreements

Eurosystem liquidity in terms of U.S. dollar swaps over time. During the GFC, central banks also created swap lines to address currency bottlenecks, in addition to the U.S. dollar. The ECB has entered into swaps with several countries to deal with pressure on the availability of the euro: Sweden, Hungary, Denmark, Latvia, Poland and the United Kingdom. (BIS, see page 30). The SNB has included swiss franc swaps with Poland, Hungary and the United Kingdom. (BIS, page 31). The BOJ included Japanese yen swaps with Korea and India. (BIS, page 32). On March 15, the Fed and five central banks with which it agreed on existing unlimited swap lines agreed: (i) a 25 basis point reduction in the interest rate; The interest rate is now the exchange rate of the day index (OIS) plus 25 basis points; (ii) 84-day loans, in addition to their current weekly activities, effective March 16.

The five central banks are the Bank of Canada, the Bank of England (BoE), the European Central Bank (ECB), the Bank of Japan (BoJ) and the Swiss National Bank (SNB). (The Fed`s website on which swaps are discussed). The Fed calls them “key banks.” The amendments must be maintained as long as they are appropriate to smooth the operation of U.S. dollar financing markets. On 12 December 2007, the Federal Reserve extended the swap lines to the European Central Bank (ECB) and the Swiss National Bank (SNB). Demand for dollars from European banks had soared and increased the volatility of US dollar interest rates. Swap lines should “oppose increased pressure on short-term financing markets” and do so without the Fed having to directly finance foreign banks. Currency swap lines between central banks allow the receptive central bank to obtain currencies and redistribute them locally to its national banks without having to use its foreign exchange reserves.

This can be very valuable because it allows the central bank to keep its reserves for its own needs. Swaps can also increase reserves that are not sufficient to meet growing demand. Following the 1997/98 Asian financial crisis, the Association of South Asian Nations (ASEAN), China, South Korea and Japan established a network of bilateral currency exchange agreements “to complement existing international institutions.” In 2010, the Chiang Mai Initiative (CMI) was multilateralized, meaning it was transformed by a network of bilateral agreements between countries into a single agreement, the Chiang Mai Initiative Multilateralization (CMIM).

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