Central bank dollar swap lines and overseas dollar funding costs

Goldberg, Linda S.; Kennedy, Craig; Miu, Jason

Journal Article

Central bank dollar swap lines and overseas dollar funding costs

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.

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