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Central bank dollar swap lines and overseas dollar funding costs

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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.

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  • Linda S. Goldberg & Craig Kennedy & Jason Miu, 2011. "Central bank dollar swap lines and overseas dollar funding costs," Economic Policy Review, Federal Reserve Bank of New York, vol. 17(May), pages 3-20.
    • Handle: RePEc:fip:fednep:y:2011:i:may:p:3-20:n:v.17no.1
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    1. Bank for International Settlements, 2008. "Central bank operations in response to the financial turmoil," CGFS Papers, Bank for International Settlements, number 31, december.
    2. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
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    More about this item

    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);
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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