Central bank liquidity swap line
An arrangement under which the Federal Reserve lends dollars to another central bank against its currency, so that bank can relieve dollar funding stress among its own banks.
Also called: dollar swap lines, Fed swap lines.
The Fed swaps dollars for euro, yen or sterling at the prevailing spot rate, with an agreement to reverse the trade later at the same rate. The foreign central bank takes the credit risk of lending those dollars onward to its own banks; the Fed's counterparty is the central bank itself.
This is the institutional answer to the eurodollar problem. Dollar liabilities are created worldwide by institutions with no access to the Fed, and in a squeeze somebody has to supply the dollars those liabilities settle in.
Swap lines became standing arrangements between six major central banks after 2008 and were widened dramatically in March 2020. They are the least-discussed and most consequential piece of global crisis architecture.
The mechanics
- Leg one
- The Fed credits the foreign central bank with dollars; it receives its currency in exchange.
- Onward lending
- The foreign central bank auctions those dollars to its own banks against collateral.
- Risk
- The Fed faces a central bank, not a commercial bank, and holds foreign currency throughout.
The common misreading
That swap lines are a bailout of foreign banks by US taxpayers. They are collateralised, reversed at the original exchange rate, and have historically been profitable — the alternative is a dollar shortage that lands back on US markets anyway.
Related terms
- EurodollarA US dollar deposit held at a bank outside United States jurisdiction — dollars created offshore, beyond the Federal Reserve's direct reach.
- Discount windowThe Federal Reserve's standing facility for lending directly to banks against collateral — the backstop that is supposed to cap how high short-term rates can go.
- Repurchase agreementThe sale of a security combined with an agreement to buy it back at a set price and date — legally a sale, economically a loan secured by collateral.
Primary sources
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