The swap lines during COVID
The Federal Reserve with the onset of the pandemic:
- Reactivated the five swap lines with the world’s main central banks and established a further nine temporary swap lines with Australia, Brazil, Mexico, Denmark, Korea, Norway, New Zealand, Singapore, and Sweden;
- In addition, it also increased the maturities of the swaps;
- In early April 2020, the volume that the Federal Reserve provided via swaps stood at close to $400 billion, reaching a peak of approximately $450 billion at the end of that month;
- The Bank of Japan and the European Central Bank were the biggest users of this line, taking up liquidity in US dollars for a total of $225 billion and $145 billion, respectively.
Central Bank Currency Swap Lines
Authors: Enrique Esteban García-Escudero, Elisa J. Sánchez Pérez
From: Banco de España
Swap lines and covered interest parity
In this paper Bahaj and Reis analyze the impact of the extension of US dollar swap lines during the COVID crisis on covered interest parity (CIP) deviations across currencies.
- Impact on the original active network (Japan, Eurozone, UK, Switzerland): after a short spike in CIP deviations from March 13 until March 22nd when the swap line was drawn, CIP deviations remained contained.
- Impact on the new active network (Sweden, Norway, Denmark, Singapore): the CIP deviations rose during the week of March 9th-14th and then fell below the new ceiling once the auctions were settled.
- Impact on the new inactive network: for the Australian dollar and the New Zealand dollar, the CIP deviations have been negative for a long time, and they continued to be so during this month. These two central banks did not use the swap lines.
South Korea and Mexico among the newcomers, and Canada from the original network , as of the end of March 2020, had not yet completed a swap line operation to allow their banks to borrow the US dollars, even though the size of the CIP deviations could justify it.
A final question is whether, while the swap lines are effective, are they welfare enhancing? Especially if they contribute the primacy of the US dollar and encourage foreign banks to ex ante accumulate large FX exposures?
Central bank swap lines during the Covid-19 pandemic
Authors: Saleem Bahaj, Ricardo Reis
From: Centre for Macroeconomics, London School of Economics
CIP deviations as of August 2020
[T]the dollar liquidity swap lines [have been] designed to help maintain the flow of credit to U.S. households and businesses by reducing risks to U.S. financial markets caused by financial stresses abroad.
How the Federal Reserve’s central bank swap lines have supported U.S. corporate borrowers in the leveraged loan market
By: Annie McCrone, Ralf Meisenzahl, Friederike Niepmann, Tim Schmidt-Eisenlohr – Federal Reserve Board
