The Federal Reserve Bank of New York today released The Federal Reserve’s Foreign Exchange Swap Lines, the latest article in its series Current Issues in Economics and Finance.
Authors Michael Fleming and Nicholas Klagge provide an overview of the U.S. dollar swap line program—a system of reciprocal currency arrangements with foreign central banks—introduced by the Federal Reserve in late 2007 to address global disruptions in dollar funding markets. The swap lines increased the ability of foreign central banks to provide U.S. dollar funding to financial institutions in their jurisdictions at a time when interbank lending was effectively frozen.
As Fleming and Klagge explain, increasing credit and liquidity constraints at the onset of the financial crisis strained the worldwide market for U.S. dollar funding. In response, the Fed took two steps in December 2007: it created the Term Auction Facility to provide dollar funds directly to U.S. banks and the swap line program to alleviate dollar funding pressures overseas.
Over the two years that the swap line program was in operation, the Fed expanded the scope of the program, extending swap lines to additional central banks and removing caps on the amounts made available. The authors note that at the program’s peak in December 2008, swaps outstanding totaled more than $580 billion, accounting for over 25 percent of the Fed’s total assets.
To determine how dollar funding conditions overseas responded to the swap line program, Fleming and Klagge trace the changes in three measures of funding pressures—the overseas-U.S. Libor spread, the dollar basis and the lending rates from overnight U.S. dollar auctions conducted by foreign central banks. “Overall,” the authors conclude, “the evolution of funding pressures during the crisis suggests that swap line program announcements and operations were effective at easing strains in dollar funding markets."
Michael J. Fleming is a vice president and head of the Capital Markets Function in the Research and Statistics Group at the Federal Reserve Bank of New York and Nicholas J. Klagge is an economic analyst in the Risk Analytics Function of the Bank’s Credit and Payment Risk Group.