Central Bank Foreign Currency Swaps and Repo Facilities Survey

Central banks enter into swaps and repos for several reasons, but since the Global Financial Crisis, they have increasingly used these facilities to address liquidity constraints in their currencies outside their borders.

Central banks enter swap arrangements for five basic purposes: (i) to provide downstream liquidity in the Lender’s currency to a foreign jurisdiction, effectively extending discount window or LOLR operations; (ii) to boost reserves of the Borrower; (iii) to respond to or encourage increased trade in the Lender’s currency; (iv) to manage balance of payments; or (v) to serve as bridge funding for the Borrower to achieve a multilateral support package from international sources such as the IMF. 

Since our survey focuses on crisis-fighting measures, all but two of the 23 cases we reviewed included liquidity provision as a goal; the two that did not still emphasize financial stability through supporting the borrowing central bank’s reserves (Scandinavia–Iceland 2008 and China–Argentina 2014). Thirteen cases stated liquidity provision as their sole purpose. (See Figure 3.)

Central banks use swaps to provide downstream liquidity in the Lender’s currency to banks in the Borrower’s foreign jurisdiction, effectively extending the Lender’s discount window or LOLR function.

Since the GFC, central banks have greatly expanded the use of swaps for liquidity provision. The overwhelming majority of the cases in our survey addressed liquidity strains at times of crisis or market stress or when such was imminent. Most of these swap lines sought to facilitate downstream lending in the Lender’s currency to financial institutions in the borrowing central bank’s jurisdiction (see Key Design Decision No. 10, Downstream Use of Borrowed Funds). The regional swap frameworks in three of our cases—ASA 1977, ASEAN 3 CMIM 2010, and SAARC 2012—were not entered into in close proximity to a crisis. However, ASA 1977 and ASEAN 3 CMIM 2010 anticipated the use of the resulting swap arrangements for liquidity purposes in a crisis.

Swaps enable the lending central bank to extend its role as LOLR internationally, with the borrowing central bank bearing the credit risk of the downstream lending to its domestic financial institutions. “What is novel is the presence of an intermediary: the recipient central bank doing the monitoring, picking the collateral, and enforcing repayment” (Bahaj and Reis 2022b, 1659). The Lender bears only the sovereign credit risk of the Borrower, a risk that participants typically consider to be negligible in the case of advanced economies. There are good reasons for the Lender to shift credit risk to the Borrower. The Borrower should have greater knowledge of the domestic financial institutions that it supervises and regulates. It should thus be in a better position to evaluate the solvency of the borrowing banks, the quality of their collateral, and the potential for moral hazard in ex ante bank risk-taking (Bahaj and Reis 2018).

During the GFC, the Fed established a new precedent by resurrecting swap lines, which had previously been used extensively during the Bretton Woods era for currency stability, as liquidity-providing crisis-fighting tools. Beginning in late 2007, the Fed extended swap lines to 14 central banks to “[provide] dollar funds that those central banks could lend in their jurisdictions” (Fed 2008, 33) and “improve liquidity in dollar term funding markets” (FOMC 2007a, 13-14). Many of those swap lines were drawn upon shortly after adoption and then repeatedly; some were never drawn upon but in aggregate were one of the Fed’s most significant tools in combatting the crisis with a peak outstanding of USD 583 billion (Fed n.d.a). The Fed also reinstated five swap lines during the Sovereign Debt Crisis (SDC) (US­–Multiple 2010–11) and enhanced the terms of these lines during the COVID-19 pandemic, while reintroducing the other nine on a temporary basis (which had a peak outstanding of USD 449 billion between the 14 lines) (Perks et al. 2021). Other central banks also quickly recognized the utility of swaps. Other GFC-era arrangements included the Swiss National Bank’s swaps with the ECB, National Bank of Poland (NBP), and the central bank of Hungary (Magyar Nemzeti Bank, or MNB). The ECB’s swap with Danmarks Nationalbank (DNB) and the ECB’s repos with the NBP and MNB are also in this category.

Some central banks have adopted swap lines as precautionary measures early on rather than in the midst of crises (Allen and Moessner 2010; Steil, Della Rocca, and Walker 2021). For example, the Eurozone and Sweden set up a swap in December 2007 “to provide liquidity in EUR in case of adverse developments” (ECB 2007, 1). Sweden first drew on the swap in 2009 (ECB 2009b). Other examples are the ECB’s swap lines with the Central Bank of Ireland (CBIR) and the BoE in 2010. The ECB said of these lines that they would “[allow] pounds sterling to be made available to the Central Bank of Ireland as a precautionary measure, for the purpose of meeting any temporary liquidity needs of the banking system in that currency” (ECB 2010). The line was only minimally used (Wiggins 2023).

Central banks use swaps to boost reserves.

In six of our cases, central banks established swap lines as a precautionary measure to bolster the foreign reserves of a recipient central bank (China–Argentina 2014, Scandinavia–Iceland 2008, US–Mexico 1982, and US–Mexico 1994, as well as SAARC 2012 and US FIMA Repo 2020). This lending can help support a borrowing central bank as it pursues additional long-term assistance. In May 2008, the central banks of Denmark, Norway, and Sweden established bilateral euro swap lines with the Central Bank of Iceland (CBI). At the time, the CBI had inadequate foreign reserves relative to the liabilities of its country’s banking system. It entered into the swap arrangements “to strengthen confidence in the Icelandic economy in the short term” and to stabilize the economy while the government addressed fundamental vulnerabilities (SIC 2010, 175). The lending central banks did not expect the CBI to draw upon the facilities, although it later did (SIC 2010, 1:175).

Central banks use swaps to manage their balance of payments issues.

Five of our cases emphasized the use of swaps to address balance of payments issues, typically for emerging market economies. The ASA’s purpose was “to provide short-term foreign exchange liquidity support for member countries that experience balance of payment difficulties” (ASEAN 2005). The CMIM resolved “to address balance of payment and/or short-term liquidity difficulties in the ASEAN 3 region” (AMRO n.d.). These facilities were not used during the GFC or the COVID-19 pandemic (Hoffner 2023a; Hoffner 2023b; Steil, Della Rocca, and Walker 2021). The RBI launched the SAARC swap framework in 2012 to provide backstop financing to other South Asian countries facing “balance of payments and liquidity crises” (RBI 2012).

Central banks use swaps to promote trade in their currencies.

In four of our cases, trade-related goals were prominent. In 2011, China established a swap line with Mongolia to “facilitate bilateral investment and trade and safeguard regional financial stability” (PBOC 2012). This was one of five swap lines China established that year. By 2020, the PBOC had extended 31 swap lines (Perks et al. 2021). The PBOC uses swap lines to promote the renminbi as a trade currency (China Daily 2014). Scholars have concluded that these lines effectively promote Chinese trade (Liao and McDowell 2015; Perks et al. 2021). However, recent scholarship by Horn et al. (2023) demonstrates that countries (often with weak credit and low reserves) have used their swap lines with China to resolve persistent balance of payments issues rather than to address a shortage of renminbi liquidity.

Central banks may use swaps as a bridge to longer-term financing.

Swap lines also often served as a bridge to longer-term support from international sources such as the IMF or Bank for International Settlement (BIS). For example, Iceland in 2008 and Mexico in 1982 and 1994 used swap arrangements as bridge funding to stabilize their currencies until they could arrange longer-term financial assistance from the IMF or other sources. In addition, among our cases, seven other countries (Argentina, Hungary, Ireland, Poland, Sri Lanka, the Maldives, Mongolia) also received IMF assistance in close proximity to the swap arrangement or during its tenure.

Borrowing central banks may use swap lines for other than their intended purposes.

Whether drawn funds will be used as expected is a factor that lending central banks consider in deciding to enter into a swap arrangement: swap lines may be used for purposes other than those for which they were originally intended. Typically, swap agreements do not include limitations on the use of funds received from a swap draw; the Borrower determines how it will use the funds drawn (see Key Design Decision No. 10, Downstream Use of Borrowed Funds). During the GFC, the SNB announced that it would draw USD 60 billion under its swap line with the Fed to help finance purchases of assets from a major Swiss bank, an atypical use (FOMC 2008). When the Fed approved swaps with four emerging market central banks (Brazil, Korea, Mexico, and Singapore), the Fed included additional governance safeguards and tranching of draws to maintain a tighter rein on usage. The four central banks also had to disclose up front how they were going to use the swap funds before draws were approved (FOMC 2008). Thus, regardless of when a swap arrangement is entered into, or for what purpose, there is some risk that a borrowing central bank may use the swap to provide foreign currency liquidity to domestic banks or for other crisis-related assistance should a need arise.

Source: Authors’ compilation.

We classify swap arrangements into three broad categories: bilateral swap arrangements, multilateral swap arrangements, and swap-like repo arrangements. Such arrangements can also be temporary or standing (not having an end date).

Lending central banks often take other measures to address liquidity stresses in their currencies, both domestically and internationally. Borrowing central banks often seek additional aid through swaps with other countries, other sources of foreign liquidity, or other support from lending central banks.

Similarly, in 1994, Mexico suffered a currency crisis that threatened to impact Mexican subsidiaries of US banks. The US actively provided dollar liquidity through swaps to Mexico to sustain it until it could finalize a USD 48 billion IMF–US financial package to which the US contributed USD 20 billion. Then–US President Bill Clinton stated that the purpose of the package was to protect United States jobs, exports, and immigration interests, and address security concerns threatened by Mexico’s liquidity crisis (Clinton et al. 1995; Swaminathan and Wiggins 2023).

In the Iceland case (Scandinavia–Iceland 2008), there is described a history of political and economic cooperation among the governments of the Nordic countries owing to the region’s close geographic, cultural, and commercial ties (FSB 2016; Wajid et al. 2007).^FNRecognizing the cross-border financial linkages throughout the region, the central banks of Denmark, Finland, Iceland, Norway, and Sweden signed a memorandum of understanding in 2003 establishing general principles of cooperation during financial crises (Suomen Pankki 2003). Owing to the severity of the Global Financial Crisis, the Nordic central banks found little use for the 2003 memorandum and its guidelines on information sharing and cooperation (FSB 2016). Sweden, Norway, and Denmark agreed to provide euro swap lines to Iceland to support its vulnerable economy during the GFC. Following the collapse of the Icelandic banking system, Iceland drew on the swap line to secure trade in essentials before negotiating an IMF rescue package, to which the Scandinavian countries and Finland, another Nordic country, also contributed (Hoffner 2023c).

Swap arrangements are a core function of the central bank’s mission. In all our cases, they were authorized under existing laws, usually by the highest governing body of the central bank, although in a few instances, approval from another body was required.

All the central bank swaps arrangements we reviewed were authorized under the bank’s existing legislative authority in its applicable jurisdiction; no new laws had to be adopted. Additionally, the authority to enter into swaps resides in the highest level of the central banks and is typically contained in the authorities for monetary policy or embedded in the authority to enter into foreign currency transactions.

For example, at the Fed, authority resides in the Board of Governors, which has decided to act through the Federal Open Market Committee (FOMC), a committee composed of governors of the central bank (FOMC 2020b; USG 1913). At the ECB, the Governing Council, the ECB’s decision-making body, makes decisions regarding whether to enter into a foreign currency swap agreement (ECB 2021b; ECB 2022d).

In a few cases, approval or cooperation from another government entity in addition to the central bank, usually but not always the fiscal authority, was required (or if not required, a critical element to the arrangement). For example, the PBOC’s enabling law gives it the authority to engage in “relevant financial activities,” but most PBOC decisions (if not day-to-day monetary policy operations) must be approved by the State Council (Arnold 2023c). In another example, the DNB entered into its swap agreement with the ECB in 2008 only after negotiations with the Royal Bank Commissioner, as required by Section 2(3) of the Danish Act on Foreign Exchange of 1988, which sets out foreign exchange policy for Denmark (Gupta 2023c). As described in Scandinavia–Iceland 2008, Norges Bank required approval from the Norwegian Ministry of Finance to establish a swap line with Iceland (Norges Bank 2009; Norwegian Government 2007). In the two cases of US assistance to Mexico, in 1982 and 1994, the Treasury independently extended swaps to the Bank of Mexico (Banxico) and also backstopped several Fed swaps through its Exchange Stabilization Fund^FNThe US Treasury extends swap lines through the Exchange Stabilization Fund (ESF) (US Treasury n.d.). The swap facilities are administered by the Federal Reserve Bank of New York as fiscal agent for the US and the operating arm of the Fed. The president and Treasury secretary were also authorized to use the ESF to provide loans and credits to Mexico under section 10(a) of the Gold Reserve Act of 1934 (USG 1934) and under Title 31 under the United States Code, Section 5302 (Swaminathan 2023b; Swaminathan and Wiggins 2023; USG 1934, 5–6; US Treasury n.d.). (Swaminathan 2023b; Swaminathan and Wiggins 2023).

The legal authority for countries to participate in the ASA, a multilateral swap arrangement, was based in the authorities of the central banks (and monetary authorities) of the participating countries. The original 1977 memorandum of understanding (MoU) on the ASEAN Swap Arrangements was signed by the central bank governors of the five originating countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand). The legal standing of the MoU may vary by country; in the case of the Philippines, the MoU was classified as a treaty and ratified through a senate resolution even though the MoU did not itself require ratification (Senate of the Philippines 1977).

The CMIM is not a standing fund or separate legal entity but is a contractual agreement among the participants that creates a multilateral swap arrangement in the form of a pooled reserve fund (AMRO n.d.; APT 2010; Han 2022). The agreement was signed by the finance ministers and central bank governors of the 13 participating ASEAN 3 countries and the head of the Hong Kong Monetary Authority; thus, the arrangement relies on the authorities of the central bank and the fiscal authorities of the participating governments. (Ciorciari 2011). Under the agreement, each country commits to fund future requested draws under the agreement, up to predetermined amounts and subject to certain opt-out rights (Ciorciari 2011). The form of a MoU and a treaty were also considered but rejected in favor of the contract. However, the CMIM agreement does not necessarily hold the status of a law in each member country’s domestic legal system, unlike a treaty would, and “was perceived to be accompanied with a lesser degree of commitment than would be the case with a treaty,” which would have required ratification by each participating country (Han 2022, 736).

The CMIM’s relatively light institutional design and legal basis reflects compromises made to comply with the members’ differing legal systems. Initially, members agreed to structure the CMIM as a self-managed reserve pooling arrangement wherein participating central banks would transfer the legal ownership of a portion of their reserves to a newly created legal entity—a “virtual fund” (Han 2022). Although this model would have provided “greater financing certainty,” it was ultimately abandoned owing to incompatibilities with certain members’ legal systems (Han 2022). To expedite the establishment of the CMIM, members, therefore, opted for a contractual agreement with commitment letters. The CMIM has yet to be activated, and uncertainty of financing remains one of the agreement’s biggest challenges. Han (2022), an official at AMRO (ASEAN 3 Macroeconomic Research Office), the CMIM’s surveillance unit, suggests that transforming the agreement into a treaty may reduce such uncertainty by enshrining the commitments into law.

The RBI initiated the SAARC framework (India is the sole funder) in 2012, pursuant to its authority under the 1934 Reserve Bank of India Act, but the government’s Union Cabinet (the highest executive decision-making body) also had to approve the RBI’s actions (GoI 1934; RBI 2022). All subsequent extensions and amendments to the SAARC framework also require Union Cabinet approval (RBI 2012).

Governance of swap and repo lines (and frameworks), including approval or amendment of arrangements and key terms (eligibility, amount, interest rate, collateral, duration of swaps), and approval of swap draws is done at the highest level of the central bank, although in some limited circumstances, approval by the government may also be required.

The authority to enter into swap and swap-like repo arrangements resides at the highest level of the central banks. At the Fed, this is the FOMC, a committee of the Board of Governors (FOMC 2020b; USG 1913). At the ECB, it is the Governing Council, the ECB’s highest decision-making body. Typically, these bodies, and their equivalents at other central banks, govern swaps and make the high-level decisions. These governing bodies are responsible for approving the swap agreements and their basic terms such as length of agreement, amount, acceptable collateral, duration of draws, interest rates, exchange rates, and any special terms (see Key Design Decision No. 5, Administration). The governing body also often approves any extensions of the arrangements, amendments to terms, approval of supplemental agreements, or change of form of agreement such as conversion to a standing agreement. For example, the chair of the FOMC must preapprove all amendments to existing swap arrangements (FOMC 2021a). The governing bodies are also responsible for adopting repo frameworks and approving the agreements made under them. These bodies also approve any amendments or extensions to the frameworks, as when in July 2021, the FOMC changed the FIMA Repo Facility from a temporary facility to a standing facility (Fed 2021b), or when the ECB Governing Council extended its EUREP facility until 2024 (ECB 2022a).

We also observe that the highest level of lending central banks authorizes draws under a swap agreement, but with some nuances. For example, as set forth in the Authorization for Foreign Currency Operations, the chair of the FOMC must preapprove all draws under the standing or temporary dollar-liquidity agreements (FOMC 2021a). The entire FOMC must preapprove draws under the reciprocal NAFA with the BoC and Banxico (see US–Mexico 1994) and under any foreign currency liquidity agreement (FOMC 2021a). In this area, authorized parties may delegate authority to streamline processing. For the reciprocal NAFA and standing foreign currency swaps, if the FOMC is not available to act, then the three-member Foreign Currency Subcommittee^FNThe Foreign Currency Subcommittee consists of the chair and vice chair of the committee and the vice chair of the Board of Governors (or another Board member designated by the chair as an alternate if a member of the Board serving on the subcommittee is unavailable, and the alternate of the vice chair of the committee if the vice chair of the committee is unavailable) (FOMC 2021a). can act in its place (FOMC 2021a).

In some limited circumstances, approval by the government in addition to the central bank was required regarding the establishment, amendment, or extension of swap arrangements.^FNWe also saw approval by the US Treasury of several swap lines in our US–Mexico 1982 and US–Mexico 1994 cases. However, these were swap lines extended by the Treasury under the Exchange Stabilization Fund separately from any Fed swap lines. The Treasury swap lines were also administered by the FRBNY as the fiscal agent of the government (Swaminathan 2023b; Swaminathan and Wiggins 2023).We saw this in our cases involving the PBOC and in those involving the RBI under the SAARC framework, where the RBI is the sole funder and lending bank (RBI 2012). All subsequent extensions and amendments to the SAARC framework also require Union Cabinet approval (RBI 2012).

Some governing bodies delegate some of their authority regarding swap and repo lines to lower-level bodies and often adopt guidelines that these administrative bodies rely on as guidance.

Governing bodies may delegate the authority to handle the administration of swaps and repo lines to lower-level bodies or departments to streamline processes. An example of this is the Fed’s Authorization for Foreign Currency Operations and related Foreign Currency Directive. The Authorization sets out the broad delegation of administrative authority to the Federal Reserve Bank of New York (FRBNY, the selected Reserve Bank) and the general parameters of foreign currency operations that it should follow in conducting such operations on the FOMC’s behalf. The Directive specifically directs the FRBNY to manage the enumerated swap lines in accordance with the Authorization. Both documents are internal procedural mechanisms that the FOMC adopted to facilitate its work, which it can amend from time to time, as it did on March 19, 2020, to provide for operation of the temporary dollar-liquidity swap lines that it authorized (FOMC 2020b; FOMC 2020c). In bifurcating these administrative guidelines, the FOMC can efficiently modify the Directive as swap lines change without the need to disturb the broader guidelines embodied in the Authorization. The Directive was again amended on January 25, 2022, to remove the enumerated temporary US dollar-liquidity swap lines (FOMC 2022). Administration of the FIMA Repo Facility is also delegated to the FRBNY (FOMC 2022).

The ECB’s Governing Council^FNThe ECB’s Governing Council consists of 25 total members—six from the Executive Board and the governors of the 19 national central banks (Lawson 2020). is the body that makes the high-level decisions regarding currency swap agreements. The ECB has adopted a “main framework within which it uses strict criteria to assess the conditions under which to grant swap and [bilateral] repo lines to non-euro area central banks” (ECB 2022c).^FNThe ECB’s Governing Council determined principles for liquidity assistance to non–euro area EU countries on October 20, 2008 (ECB 2008c). These principles are summarized in the Agreement on Emergency Liquidity Assistance (ELA), published on November 9, 2020. This emergency assistance document will be reviewed in 2023 (ECB 2020e). See also Key Design Decision No. 7, Eligible Institutions. The ECB has not disclosed this document, which the Governing Council uses to “assesses incoming requests for liquidity lines on a case-by-case basis” (ECB 2022c). However, it has disclosed some of the criteria it considers; see Key Design Decision No. 7, Eligible Institutions.

In practice, the ECB’s Executive Board reviews the proposed terms of a request for a swap arrangement from a non–euro area country, such as Hungary, against the framework and submits an analysis and recommendation to the Governing Council, which makes the final decision. In October 2008, the Governing Council decided to accept the recommendation of the Executive Board to grant Hungary a bilateral repo line (requiring it to deposit euro-denominated securities as collateral) instead of the swap line it had requested (Gupta 2023a).

The Governing Council also approved the EUREP and its basic terms (eligibility, interest rate, and collateral) (Lawson 2020). Approval of the applications under EUREP are also made by the Governing Council (ECB 2022b).

Governance of the multilateral networks—SAARC, ASA, and CMIM—is also vested in the highest level of the authorized entity. For example, the RBI makes the decisions under the SAARC. Under the ASA and CMIM, the finance ministers and governors of the central banks from the 13 participating countries make the decisions. Originally, the CMIM agreement established the Ministerial Level Decision Making Body (MLDMB)—initially made up of only the ASEAN 3 finance ministers—as the body responsible for voting on CMIM governance decisions (for example, total size and contribution amounts) through consensus approval (AMRO n.d.; APT 2010). In July 2014, the CMIM was amended to include the central bank governors in the MLDMB and thus in governance decisions (Han 2022). Deputy-level representatives of the participating central banks and finance ministries vote on decisions related to swap draws, renewals, and cases of default (AMRO n.d.). As discussed in Key Design Decision No. 5, Administration, the MLDMB has also adopted certain administrative practices, including designating an Agent Bank, to facilitate efficient administration of the network.

Typically, central banks disclose the existence of swap arrangements and their key terms, but disclosure of the swap agreements and draws varies by bank. The Fed makes weekly aggregate disclosures under its FIMA Repo Facility, while the ECB does not disclose EUREP usage.

Although we were not able to identify all applicable disclosure requirements, central banks generally contemporaneously publicly announced entering into a swap agreement, identifying the counterparty, maximum amount, collateral, and duration of the agreement. Parties may do this to signal the availability of funds or because of a legal requirement. In all but three of the 67 swap and repo arrangements in our cases, Lenders announced the swap agreements on signing (exceptions include Eurozone–Sweden 2007; China–Argentina 2014; and China–Mongolia 2011, which was delayed) and in all of our cases, the Lenders and Borrowers later disclosed the arrangements in their annual reports. The PBOC also disclosed the dates and sizes of renewals and amendments of its swap lines in its renminbi internationalization reports (Arnold 2023c). The ECB and Riksbank purposely delayed announcing their swap arrangement in 2007 (ECB 2007); however, both parties later disclosed the existence of the agreement in their annual reports issued in 2008 and announced the first draws several years later (Gupta 2023d). The Bank of Mongolia (BOM) did not disclose that it had signed a swap agreement with the PBOC, but it disclosed it in its annual report, and both parties issued press releases when they extended the agreement (Arnold 2023c).

One of our cases describes an interesting situation that led to increased disclosure. The United States’ significant aid to Mexico through swaps in 1994 was controversial in Congress. Since it appeared Congress would not approve an aid package to Mexico, President Clinton and his secretary of the Treasury relied on the Treasury’s Exchange Stabilization Fund (ESF) and the Fed to provide USD 20 billion in medium-term assistance (Lustig 1997). Congress answered with a bill that required the president to make additional disclosures regarding use of the ESF (Swaminathan and Wiggins 2023).

Several of the central banks participating in the Major Bank Swap Network have disclosed their actual swap agreements (the ECB, Fed, BOJ), but the Fed has not disclosed swap agreements with counterparties other than those in the network. The ECB has disclosed some of its swap agreements and some of the Executive Board memoranda relied on by the Council in considering whether to enter into a swap or repo.

The Fed does not disclose information regarding participants that have applied for or been approved for a repo under the FIMA Repo Facility (Fed 2020e). However, repo counterparties can disclose their access to and use of the facility if they so choose to (see Key Design Decision No. 6, Communication) (Fed 2020e). The central banks of Chile, Colombia, Ghana, Indonesia, Sri Lanka, and Hong Kong announced in 2020 that they had signed agreements with the Fed to access the facility, and Hong Kong publicized its use of the facility (Kelly 2023). Similarly, the ECB has said that it does not disclose the names of any repo counterparties approved under the EUREP (ECB 2022d), but we know that the ECB has approved a number of countries to use the facility because two counterparties have chosen to disclose this fact. In 2021, the Central Bank of the Republic of Kosovo disclosed in its 2020 annual report that it had signed a repo agreement under the facility for EUR 100 million (CBK 2021). In 2022, the Central Bank of Montenegro announced that it had also gained access to the facility for EUR 250 million (CBCG 2022). Neither country has said publicly whether it ever drew on those lines.

Generally, most central banks do not disclose information regarding possible counterparties that they have considered for swap or repo arrangements but not entered into an arrangement with, most likely out of concern for stigmatizing the unsuccessful candidate.^FNCandidates may be identified in meeting transcripts that are later released. In a similar vein, many borrowing central banks make public the names of their downstream borrowers of foreign currency only years later (Bahaj and Reis 2021). The SNB does not disclose which banks borrowed US dollars under its downstream lending operations funded through its swap line with the Fed (Ostroff and Patrick 2022). Central bank disclosure of draws under individual swap or repo arrangements varies. The Fed discloses the aggregate amounts of swaps and FIMA repos outstanding in its H.4.1 report—the Fed's weekly snapshot of its balance sheet. It also regularly discloses swap activity by individual foreign central bank in releases on the FRBNY’s website (Fed 2023a).

The ECB publishes weekly data on the aggregate daily amount of liquidity provided across all central bank liquidity lines (swaps and repos) established under its main framework and the EUREP (ECB 2022d). Additionally, on January 17, 2023, the ECB said that EUREP was “being used in response to the uncertain environment caused by the Russian invasion of Ukraine” (ECB 2022c).

The PBOC disclosed the existence of swap lines but did not provide additional information in its annual reports. It disclosed the dates and sizes of renewal, as well as amendments of its swap lines in its renminbi internationalization reports (Arnold 2023c). Its counterparty borrowing central banks sometimes disclosed amounts drawn, but to varying degrees of transparency (for example, sometimes via enumerating individual draws and durations, but usually by stock amount as line items on their balance sheets) (Arnold 2023a; Arnold 2023b; Arnold 2023c). The BOM did not disclose that it had signed a swap agreement with the PBOC, but it disclosed it in its annual report, and both parties issued press releases when they extended the agreement (Arnold 2023c).

Swap lines are generally simple arrangements that parties can deploy fairly quickly.

A swap framework agreement usually runs less than 10 pages (see, for example, ECB 2007; ECB and SNB 2003; FRBNY 2010). Once the framework agreement is in place specifying the key terms (for example, amount authorized, exchange rate, interest rate, collateral term), eligible parties can draw funds fairly swiftly; speed is also supported by the simplicity of the collateral. This makes swaps a useful tool in urgent situations. After the September 11, 2001, terrorist attacks, when normal transmission channels were disrupted, the Fed entered into swap agreements with the ECB, BoE, and BoC to provide US dollars. Within one day of the attack, on September 12, the ECB began drawing on the swap line (FRBNY 2001). The ECB borrowed more than USD 19 billion, which it lent to its banks; the first draws occurred prior to publication of the press release announcing the swap. Repayment occurred within a week, and the line was terminated a month later when conditions had returned to normal (French 2023d).

For efficiency, the Lender governing body often delegates the administration of the swap or repo arrangement to a lower-level body while maintaining some oversight.

The high-level governing bodies that establish swap or repo arrangements often delegate some of their authority and technical details to administrative agents that operate according to guidance the governing body provides. This guidance can promote efficiency and provide some assurance that the same terms are being applied across all potential participants.

For example, the Fed delegates authority to the FRBNY under its Authorization for Foreign Currency Operations and the related Foreign Currency Directive that the FOMC adopted (see Key Design Decision No. 4, Governance). The FRBNY thus establishes Borrower correspondent accounts and processes requests for draws as the FOMC’s agent. Still, the final approval of draws has to be made by either the chair (for the US dollar swap lines) or the FOMC (for the NAFA or foreign currency swap lines) (FOMC 2021a). For the Fed’s dollar swap lines, the Chair may preapprove a schedule of potential swap drawings and delegate to the FRBNY the approval of individual drawings under that schedule (FOMC 2021a) (see Key Design Decision No. 9, Process for Utilizing the Swap Agreement).

The FRBNY also administers the FIMA Repo Facility operations pursuant to a Standing FIMA Repurchase Agreement Resolution adopted by the FOMC (FOMC 2021b). The FRBNY services deposit and custody accounts for more than 200 foreign official and international institutions, most of which are central banks and other international monetary authorities. FIMA account holders are eligible to apply to the FOMC to use the FIMA Repo Facility (Kelly 2023). The FOMC also authorized its Foreign Currency Subcommittee to change the FIMA Repo Facility’s offering rate, term, and counterparty limits provided the Subcommittee keeps the Committee informed of any such changes (FOMC 2020f).

The ECB has also adopted a memorandum providing guidance for reviewing requests for swap agreements with non–euro area countries. The Executive Board applies the guidance and provides an analysis and recommendation to the Governing Council (ECB 2008a; ECB 2022c).

We do not have much detail about which internal entities or departments of other central banks administer swap arrangements and draws, but Key Design Decision No. 9, Process for Utilizing the Swap Agreement, describes the several ways that various central banks process draws.

The ASA and CMIM both have relatively decentralized administrative processes, coordinated by a rotating member (two for the CMIM), reflective of their structure as commitment pools. To facilitate administrative functions, the ASA appointed a participating central bank as the standing Agent Bank, serving on a two-year rotational basis based on the alphabetical order of the country (ASEAN 2005; Bank Negara Malaysia 2000). The Agent Bank administered the drawing process—initiated by a member’s submitting a request to the Agent Bank. Once received, the Agent Bank communicated the request to other member central banks, which indicated their participation. The Agent Bank then coordinated the draw and handled any renewal requests. The Agent Bank was also responsible for any administrative expenses (ASEAN 2005).

Similarly, CMIM members elect two representatives to administer the network: one from an ASEAN country and one from a Plus Three country. The representatives coordinate CMIM discussions and negotiations over CMIM activation (AMRO n.d.). Activation-related decisions (drawings, renewals, defaults) are approved through a two-thirds majority vote of the CMIM’s Executive Level Decision Making Body (ELDMB), composed of the deputy officials of the member countries’ central banks and finance ministries. Some commentors have expressed concerns that such administrative decentralization impedes the CMIM’s ability to respond to crises efficiently and quickly (Han 2022; Hoffner 2023b). Despite the occurrence of several crisis situations since its inception, including the COVID-19 pandemic, the facility remains untapped, while some members have utilized other sources of foreign exchange liquidity (such as through the Fed’s swap and FIMA Repo facilities) (Negus 2020). There is uncertainty around its operational readiness and its lack of “rapid response procedures to handle a fast-developing financial emergency” (Menon and Hill 2014, 10). Its processes for approving draws have been characterized as “slow, cumbersome and politically complex, producing widespread skepticism in its ability to provide assistance” (Drysdale, Basri, and Triggs 2020).

Lending and borrowing central banks typically announce when they put swap or repo arrangements in place, create downstream lending programs, and extend the deadlines of these arrangements. Less often, they announce when Borrowers and downstream financial institutions draw on funds, or when a swap arrangement terminates.

Central banks typically announce that they have entered into swap and repo arrangements to address a liquidity constraint or market distress. Announcements of swaps can bolster the impact of the announcement of a downstream lending program by the borrowing central bank, indicating its commitment to take direct and immediate action to address the problem. The memo of the ECB Executive Board analyzing Hungary’s request for a swap arrangement indicated that the MNB “would like to make public the existence of the agreement/facility: it expects the positive signaling effect of this announcement to contribute to the credibility of the newly created MNB’s [downstream] foreign exchange swap facility” (ECB 2008a, 2). In a similar manner, in the press releases issued by the SNB, MNB, and NBP in 2008 regarding their bilateral swap whereby the SNB was to provide Swiss francs to the MNB and NBP, both borrowing central banks also announced downstream lending of Swiss francs to their domestic banks. The press releases, often issued jointly, discussed the downstream foreign exchange swaps and the central bank swaps together. Borrowing central banks also may announce their willingness to draw on a swap line to offer future downstream lending if necessary, as the ECB did with respect to pounds sterling in the prelude to Brexit (ECB 2019).

When two parties have a standing swap arrangement, they typically make a separate announcement when they have activated it. Activation usually means that some action has been taken to move the swap closer to use. It can be a useful signal to markets.^FNPer correspondence with Saleem Bahaj, research manager at the Bank of England. In 2019, the ECB and BoE activated their standing swap leading up to the UK’s exit from the European Union “for the possible provision of euro to UK banks” (ECB 2019). Concurrently, the BoE announced a new Liquidity Facility in Euros (LiFE) under which it would lend euros to UK banks on a weekly basis. The LiFE program would be “facilitated by the activation of the standing swap line” (BoE 2019). The ECB also stated in its press release that it “would stand ready to lend pound sterling to euro area banks, if a need arises” (ECB 2019).

In March 2020, repeating a practice that had been relied on during the GFC and that had been received as very effective, the six major central banks of the Major Bank Swap Network jointly announced the activation of their agreements in cross-linked press releases with almost identical wording. (See BoC 2020; BoE 2020; BOJ 2020; ECB 2020a; Fed 2020a; SNB 2020.) The Fed’s 2020 press release described swap measures as “coordinated central bank action to enhance the provision of US dollar liquidity” (Fed 2020a). The six central banks announced that they would lower the rate for US dollar swap arrangements by 25 basis points (bps), introduce a 84-day maturity term, and increase the frequency of existing one-week maturity loan operations from weekly to daily (ECB 2020b; Fed 2020a).^FNAt the time of the first joint announcement, all partner central banks except the BoC offered US dollar-liquidity operations (Fed 2020a). A few days later, the BoC announced its intent to offer a USD Term Repo Facility if needed utilizing dollars from its swap with the Fed.

In practice, if not in wording, these releases served as a “reactivation” of these lines, as they announced that the central banks stood ready to lend under them. Collectively, they were also a strong statement of cooperation among the central banks to forestall interruption in the flow of US dollars (Fed 2011; Fed 2020a).

There appeared to be a small difference between the BoE’s and ECB’s announcements of their 2010 swap line. The ECB said the swap would provide pounds to the ECB if needed. The ECB announcements, and those of the CBIR regarding the related ECB–CBIR line, stated that the ECB–BoE line could be used only to provide pounds to the CBIR for loans to Irish banks (Wiggins 2023). It’s not clear why the descriptions differed, but the Borrower determines the use of the borrowed funds, including any restrictions on their use, so it was most appropriate for the ECB to announce this if it desired.

Differences in communication from parties to a swap can create confusion. For example, in 2014, the Central Bank of Argentina (BCRA) issued a press release that described its revised swap line agreement with the PBOC as a significant improvement on the original 2009 agreement. Later that same day, the BCRA issued a second release that struck wording from the first and further described the swap line as a demonstration of BCRA’s and PBOC’s “close relationship” and the two countries’ “comprehensive strategic partnership” (BCRA 2014). It also described the renminbi as “a very attractive investment currency” (BCRA 2014).^FNThe quoted texts are the authors’ translations of the Spanish-language press release. Meanwhile, the BCRA did not withdraw the original release, creating uncertainty about how the BRCA wanted the facility to be perceived. The PBOC did not announce the line until 2015.

Swap arrangements can also invite political controversy. Legislators in the US and public commentors in China have criticized extending swap lines to some countries (Steil, Della Rocca, and Walker 2021). One scholar has called PBOC swap lines a form of “financial statecraft” and has said that the PBOC’s extension of swap lines may be used as leverage to extract political concessions (McDowell 2019, 135-137). In 2017, the PBOC froze negotiations with Mongolia including regarding a renewal of its swap with the BOM because of the Mongolian government permitted a visit from the Dalai Lama (Panda 2016). Only after the government made certain consoling statements and agreements to China was the swap renewed (Arnold 2023c; BOM 2021; Zhang 2017).

Most major lending central banks limit the countries they have swaps with to those with which they have a close geographic, political, and economic relationship, particularly as it relates to financial stability. The PBOC, on the other hand, has entered into a large number of swaps, many with emerging market economies, to encourage trade and disseminate the renminbi.

Lending central banks do not typically disclose the criteria that they use when deciding whether to extend swap lines to another central bank (Bahaj and Reis 2021). They also do not typically disclose that they have rejected another central bank’s request for a swap agreement, out of concerns about confidentiality and stigma (Sahasrabuddhe 2019).

Sovereign credit risk is an important consideration for most lending central banks. The second- and third-largest Lenders (in numbers of swap lines), the Fed and ECB, are selective in choosing swap counterparties, reflecting their focus on swap lines as financial stability tools and their concerns about credit risk. The ECB and Fed both use repo arrangements to extend liquidity to a much broader range of counterparties.

The Fed’s Counterparties

During the GFC, the Fed rolled out swap lines to 14 central banks in four stages. It set up lines with the ECB and SNB in December 2007 to shore up funding for European banks and prevent spillovers into the US (FOMC 2007a). It later established lines with the UK, Japan, and Canada after the collapse of Lehman Brothers in mid-September 2008, and with five smaller advanced economies—Australia, Denmark, New Zealand, Norway, and Sweden—later in the month and in October (Allen and Moessner 2010). Fed officials internally described the final four countries to receive swap lines—Brazil, Korea, Mexico, Singapore—as emerging market economies (FOMC 2008). The FOMC discussed at length whether or not to extend these lines and considered alternatives, such as repos, to provide additional security, and in the case of Mexico, enlarging the existing NAFA swap line (FOMC 2008). In an October 2008 meeting, FOMC members agreed that, although emerging market economies, these countries had strong macroeconomic fundamentals and the credit risk to the Fed would be minimal. However, some members argued that the approval of these lines would lead to many requests from other central banks, which would require individual consideration in the absence of a bright-line test. The question, left unresolved, became where to draw the line (FOMC 2008).

Nathan Sheets, a former director of the Fed’s International Finance Division, described three criteria that the Fed staff used in making its recommendations:

• Is it a large, systemically important economy?
• Is the economy one in which the country’s policies have been strong and it appears that it is largely being influenced by contagion? and
• Is it a country for which we believe that the swap line might actually make a difference? (FOMC 2008)

Fed officials also discussed the likelihood that these four countries would request IMF assistance but agreed it was unlikely. Fed officials viewed the IMF as better suited to providing financial support to smaller countries (FOMC 2008). The Fed also recognized that several emerging market economies were large holders of US Treasuries; without access to US dollar liquidity, there was a risk they would liquidate their holdings (Sheets 2019). A US Government Accountability Office audit revealed that the Fed had considered other criteria: whether recipient countries were large trading partners, held high levels of foreign reserves, or had financial linkages with US banks (Sahasrabuddhe 2019).

Sahasrabuddhe (2019) argues that the Fed also had geopolitical motives. Brazil had shown promise in financial liberalizing and had an influential role in the Group of 20; Korea had rising political influence in Asia, growing economic ties to the US, and large foreign exchange reserves; Mexico was a neighbor with a close economic relationship to the US, and its stability was a national security concern; and Singapore was an important global financial center, and also demonstrated strong economic fundamentals (Sahasrabuddhe 2019). Several countries said that the Fed had rejected their requests for swaps during the GFC: Chile, the Dominican Republic, Iceland, India, Indonesia, Peru, and Turkey (Sahasrabuddhe 2019).

Unlike the PBOC, the Fed has not expanded its swap lines beyond its 14 GFC counterparties. The Fed and the central banks of Canada, the euro area, Japan, Switzerland, and the UK agreed to convert their reciprocal swap arrangements into an uncapped standing multilateral network in 2013, the Major Bank Swap Network. During the COVID-19 crisis, the parties activated the network, and the Fed again extended temporary US dollar–liquidity lines to the other nine central banks that had lines during the GFC (Fed 2020c). Aizenman, Ito, and Pasricha (2021) find large trade ties with the US to be the most significant factor explaining the Fed’s decision to reinstate swaps with these nine countries. The authors also find that during the GFC, the dominant factor for entering into swaps with the emerging market economies was their financial ties with the US. For both crises, they find that the existence of formal military alliances was also a determinant.

In the COVID-19 pandemic, several countries without Fed swap lines began to sell their Treasuries (Choi et al. 2022; Singh 2023). The Fed responded by establishing the FIMA Repo Facility to provide dollars against Treasury collateral, a development that was responsive to arguments from emerging market economies for greater expansion of US swap lines (Aizenman, Ito, and Pasricha 2021; Fed 2020d; Fed 2020e). About 170 central banks and foreign entities were eligible to apply and 30 ultimately enrolled (Smialek 2023). The Fed’s swap lines and repo facilities combined effectively cover 80% of foreign official holdings of Treasuries. To prevent stigma, the Fed does not disclose the identities of FIMA participants (Singh 2023).

The ECB as Regional Lender of Last Resort

Since its inception in 1998, the ECB has acted as a “regional lender of last resort,” providing euro liquidity to European countries (Albrizio et al. 2022). Like the Fed, the ECB restricts swap line eligibility to a narrow set of counterparties. Prior to the GFC, it had some precautionary swap agreements with other G-10 central banks such as the BoE and the SNB, and it later came to participate in the Major Bank Swap Network. Also, during the GFC, it entered into bilateral swap lines with Sweden and Denmark and repos with Hungary and Poland (ECB 2022c). Spielberger (2023) points out that the ECB made a “clear geographic distinction between the Nordic and Eastern European central banks” (881). The swap lines to Sweden and Denmark were considered equal to the ECB’s lines with G-10 countries (for example, the UK and Switzerland) and quickly processed, while the liquidity lines to the Eastern European countries were debated and resulted in repo agreements rather than swap lines to better protect the ECB’s balance sheet (Spielberger 2023). See also Key Design Decision No. 13, Balance Sheet Protection.

At the time it considered swaps to Hungary and Poland, the ECB had not adopted guidelines as to how to determine whether to provide liquidity lines to non–euro area central banks; guidelines were adopted a short time later, but not disclosed (Spielberger 2023). The ECB stated in 2014 that it looks to the following criteria in determining whether to provide a swap or repo line:

• The existence of exceptional circumstances characterized by significant actual or potential euro liquidity needs as a result of serious market disfunctions;
• The systemic relevance for the euro area of the country requesting the swap line and the exposures of the euro area banking sector and financial markets to that country;
• The presence of sound economic fundamentals;
• The financial risk for the Eurosystem; and
• The consistency with any parallel support provided by the IMF. (ECB 2014) 

As of 2022, in addition to the standing Major Bank Swap Network, the ECB has swap lines with the central banks of China, Denmark, Poland, and Sweden (ECB 2022c). As shown in Figure 7, it also has bilateral repos with six counterparties.

In June 2020, the ECB established the EUREP facility to provide euro liquidity—secured by euro-denominated sovereign debt—to non–euro area central banks without access to swap lines or repos under its main framework (ECB 2020c; ECB 2022c). Similar to the Fed’s FIMA Repo Facility, the EUREP offers an additional tool to extend euro liquidity beyond the otherwise narrow eligibility criteria of swaps and bilateral repos. A broad range of non–euro area central banks are eligible to apply, with decisions being made by the Governing Council. The ECB did not disclose additional restrictions on eligibility (ECB 2022c).

The Role of Close Connections

For other lending central banks, our cases seem to indicate that which countries get swaps is greatly influenced by geographic proximity and economic ties between the Lender and Borrower countries. Sixteen of our 23 cases include swap and repo arrangements between neighboring or geographically close countries; the exceptions are PBOC and Fed swaps, as discussed. Regionalism alone may not fully explain eligibility in each swap arrangement but may point to other explanatory variables such as financial integration, trade, and various political factors, similar to those cited in the implementing documents of the ASA, CMIM, and SAARC, swap arrangements that emerged out of existing regional cooperation frameworks. In a somewhat similar circumstance, in 2003, the central banks of Denmark, Finland, Iceland, Norway, and Sweden signed a memorandum of understanding establishing general principles of cooperation during financial crises (Suomen Pankki 2003). A 2008 Moody’s Investors Service report recommended Iceland expand its financial safety net by soliciting support from the countries with which it already had a cooperative agreement and a history of political and economic cooperation owing to the region’s close geographic, cultural, and commercial ties (Hoffner 2023c; Moody’s 2008). The result was the Scandinavia–Iceland swap lines. Also, in 2010, at the time the BoE provided a pound sterling swap line to the ECB for the benefit of Ireland, much of UK government commentary emphasized the significant financial connections between the UK and Ireland.

Lender central banks typically set the size of swap lines in some relation to the size of the economy of the Borrower, whereas repo arrangements are usually limited only by the quantity of eligible collateral that the Borrower can provide. The only unlimited swap arrangements we came across were in the Major Bank Swap Network.

Most lending central banks set limits on the amount a Borrower can have outstanding on a swap line at any time. In several cases, the Fed has also set limits on individual draws. The only unlimited swap arrangements we came across were in the Major Bank Swap Network, which includes the Fed and five other major central banks, which began with limits. Repo lines are typically limited only by the amount of eligible collateral available to the Borrower. The Fed did not initially set a size limit on the usage of the FIMA Repo Facility but added a counterparty limit of USD 60 billion when it made the facility permanent in 2021 (FOMC 2021b).

In setting the size of a swap line, policymakers face a trade-off. Larger swap lines can provide more liquidity in foreign jurisdictions during a crisis, but they also expose the Lender to greater balance sheet risk. Lenders can manage that risk by approving each swap draw and limiting their size.

Central banks disclose very little information about how they determine the appropriate size of a swap line. In our survey, line sizes often reflected the size of a Borrower’s economy. Figure 9 shows the size of the Fed’s swap lines scaled by the borrowing country’s reserves and GDP. In addition to economic variables, political factors may also influence the size limits on swaps. The Scandinavian swap lines to Iceland, the CMIM arrangement, and the Fed swap lines offer some insight. In the Scandinavia–Iceland swaps, the Central Bank of Iceland requested swap lines of EUR 1 billion to EUR 2 billion from several central banks. Ultimately, the three Scandinavian central banks were the only ones to agree, and each established with Iceland a bilateral swap line of EUR 500 million, for a total of EUR 1.5 billion (SIC 2010, 1:173–76). Although the economies and financial resources of the Scandinavian countries differed, they nonetheless established equivalent swaps with Iceland.

In another example, the Fed maintained swap lines with 14 central banks during the GFC and COVID-19 pandemic. Its lines are unlimited with its five counterparties in the Major Bank Swap Network, although the line with the Bank of Canada was limited before 2014. To avoid the appearance of ranking its counterparties, according to officials at the Fed and the FRBNY, the Fed divided the other nine counterparties into two groups by size. Six central banks received lines of USD 30 billion and three received lines of USD 15 billion during the GFC. The Fed doubled the size of those lines in the COVID-19 crisis to reflect the counterparties’ economic growth since the GFC (Fed 2020c). As seen in Figure 9, the sizes of these two groupings do not neatly reflect the economic variables of each country. Four countries—Brazil, Korea, Mexico, Singapore—the “emerging market countries,” received smaller swaps relative to their reserves, on average, than the five “smaller advanced countries" of Australia, Denmark, New Zealand, Norway, and Sweden (FOMC 2008, 9–10).

Another US swap, one of the US swap lines extended to Mexico in 1994, included a term regarding size not usually seen in a swap line. Once a drawing under the Special Swap Line was repaid, the authorized size of the line was reduced pari passu by the amount of the draw, each use shrinking the available amount. Most swap arrangements are revolving in nature up to the maximum authorized amount (FOMC 1995; Swaminathan and Wiggins 2023).  

The ECB has not disclosed much information about how it chooses which counterparties to enter into swaps with, but its Governing Council determined principles for liquidity assistance to non–euro area EU countries on October 20, 2008 (ECB 2008c). These principles are summarized in the Agreement on Emergency Liquidity Assistance (ELA), published on November 9, 2020. The Executive Board refers to those criteria when reviewing potential candidates for swaps or repos and making recommendations to the Council, including with respect to size of the liquidity facility (Gupta 2023b).

Lending central banks may also set limits on their contributions to multilateral swap arrangements. In the ASA, the 10 ASEAN members were divided into two tiers. Tier 1 countries each contributed 15% of total commitments. Tier 2 countries contributed less than that, with the amounts varying depending on each member’s ability to pay (ASEAN 2005; Rana 2002). Similarly, the CMIM divides countries into tiers based on their ability to pay and the size of their economies. China and Japan each contribute 32% of total funding, Korea commits 16%, and the remaining 10 CMIM members contribute the remainder. Han (2022) notes that Japan and China would contribute more than 80% of CMIM funds if their contributions reflected the relative size of their economies or reserves (Han 2022). The two countries underweighted their contributions to avoid the appearance of uneven influence (Ciorciari 2011).

The CMIM also sets limits on the maximum size of a swap allocation (total outstanding draws), based on a multiple of a member’s contribution. However, that multiple is not the same for every country. The multiple is just 0.5 for China and Japan. It is 5.0 for the smallest five countries, to ensure they have access to adequate liquidity in a crisis (Han 2022).

Small Swap Lines

Some of the swaps we studied were small and more valuable as symbols of financial cooperation than as tools for financial stability. For example, in 1977 the five original parties to the ASEAN Swap Arrangement made US dollar funding commitments of just USD 20 million each, or USD 100 million total. They doubled those commitments in 1978. Due to its small size, the ASA could provide only modest support to members in need of foreign liquidity and was not used during any major financial crisis (Chandrasekhar 2021; Henning 2002, 14).

The three Scandinavian swap lines to Iceland (EUR 1.5 billion in total) were small relative to Iceland’s USD 170 billion financial system. The governor of the CBI said that the size of the swaps was less important than the symbol of solidarity and attempted to secure swaps of similar size with other central banks (SIC 2010, 179). In rejecting the CBI’s swap request, then–BoE Governor Mervyn King said that “the amount of money is very small relative to the potential need for funds should a problem arise with one or more of your banks” and that “the swap might look rather like a political gesture rather than a credible financial strategy” (SIC 2010, 173). The Fed also rejected the CBI’s request. Internally, a Fed official cited Iceland as an example of a country that did not meet one of his criteria for a Fed swap line: “that the swap line might actually make a difference” (FOMC 2008, 33) (see Key Design Decision No. 7, Eligible Institutions).

Swap Line Increases

In 19 of 67 swap and repo arrangements in our survey, Lenders authorized at least one increase, and in many, more than one. Lenders are more likely to increase swap lines in prolonged crises than in shorter stresses. During the GFC, the Fed increased eight of its swap lines several times (prior to making four lines unlimited). When it reinstated nine temporary US dollar–liquidity swap lines during the COVID-19 crisis, the Fed authorized amounts under these lines that were twice the highest amounts authorized to these counterparties during the GFC. (See Figure 9.) The Fed said, “Their limits were raised to reflect that the global economy has grown since 2008, both in real and in nominal terms, and therefore larger amounts of funding might be needed to address levels of stress in dollar funding markets” (Fed 2020c).

Usage

The most heavily used swap lines have been the Fed’s US dollar swap lines, particularly during the GFC and the COVID-19 pandemic. During the GFC, amounts outstanding under Fed swaps peaked at USD 583 billion and during the COVID-19 crisis at USD 449 billion (Choi et al. 2022; FRBNY n.d.a). As seen in Figure 9, the ECB was the dominant user during the GFC, with a peak outstanding of USD 314 billion, and the BOJ was the dominant user during COVID-19, with a peak outstanding of USD 225.8 billion. Though the BOJ, BoC, BoE, ECB, and SNB have all had standing swap lines in place since 2013, usage has largely been confined to crises. Multiple academic studies point to the effectiveness of the Fed’s heavily used swap lines during the GFC and the COVID-19 pandemic in reducing strains in global US dollar funding markets (Bahaj and Reis 2020; Choi et al. 2022).

However, of our 67 surveyed swap and repo arrangements, 14 were unused. With respect to the Fed’s swap lines, a number of lines went unused after the September 11 terrorist attacks, during the GFC, the SDC, and the COVID-19 pandemic. Nevertheless, government officials and scholars have commented positively on the benefits of swap lines as liquidity backstop facilities, supports of financial stability, and evidence of central bank cooperation, arguably validating such arrangements even when usage is absent or minimal (Bordo, Humpage, and Schwartz 2014; Fed 2020g; McCauley and Schenk 2020).

Source: Authors’ compilation.

Typically, swap agreements set out the process for utilizing the swap and only key transactional terms need to be agreed to by the parties at a draw. In most cases, a draw requires approval by the governing body or by an administrative body under preestablished guidelines set by the governing body.

The framework swap agreement signed by the two central banks usually sets out the process for drawing funds, including size, maturity limits, duration of draws, and collateral (see FRBNY 2014 and ECB 2007). Subject to the constraints of the swap agreement, the borrowing central bank initiates the draw by requesting a specific amount of the Lender’s currency and a maturity or repayment date. Once the Lender approves the request, the parties agree on the amount, the value date, the exchange rate, any swap points,^FNThe SNB’s swap agreement with the ECB states that the spot exchange rate would be based on the prevailing market spot rate, while the forward exchange rate would equal the spot exchange rate plus or minus forward swap points. Swap points are a discount or premium to account for the spread between the interest rates on the two currencies. In effect, the ECB paid the rate of interest on the Swiss francs it borrowed and received the interest rate on the euros it lent in exchange. Once the SNB and ECB agreed to a drawing, they agreed to the exchange rate and fees, along with other specifics (French 2023a). the maturity date, and the interest rate. Often, the swap agreement sets out the acceptable parameters for several of these terms, so they don’t need further approval from the governing body of the central bank.^FNFor example, in the agreement among the Fed, the BOJ, and other central banks during the Sovereign Debt Crisis, the interest rate for US dollar liquidity was specified as having a “minimum interest rate of the USD OIS rate plus 100 bps” (French 2023c). The SAARC framework specified that the interest rates charged under the SAARC framework would be the three-month London Interbank Offered Rate plus 200 basis points (bps) for dollar and euro swaps, and the RBI repo rate minus 200 bps for Indian rupee swaps (RBI 2012). The second rollover of any draw under a SAARC swap agreement would incur 50-bp premium to the previously charged interest rate (Gupta 2023e; RBI 2012).

On the transaction date, the Lender credits the borrowed currency to the Borrower’s correspondent account at the lending central bank (Bahaj and Reis 2021; FRBNY n.d.c). At the same time, the borrowing central bank credits its collateral currency to the Lender’s account at the Borrower’s bank (Bahaj and Reis 2021). On the maturity date, the transaction is reversed. The central banks debit the respective accounts based on the same exchange rate as the initial leg of the swap, with the Lender receiving its currency back plus interest and the Borrower receiving back its currency collateral (Bahaj and Reis 2021). Central banks utilize standard industry mechanisms, such as SWIFT^FNSWIFT stands for Society for Worldwide Interbank Financial Telecommunication and is a standard, secure method of communication between financial institutions (Wallace 2017). messages, for these processes (FRBNY 2014).

Swaps vary in the speed at which the parties can activate their agreements and execute transactions.

Swaps are a relatively simple tool that can be implemented quickly. In September 2001, in response to the terrorist attacks in the US, the Fed and ECB entered into a swap agreement and processed a draw under the agreement the same day, even prior to the press release announcing the swap line (ECB 2002; Fed 2001).

Some swaps have timing requirements that evidence the parties’ recognition that swift deployment may be desirable during a crisis. For example, the agreement between the ECB and the Riksbank requires that the ECB respond to a draw request from the Riksbank on the same day that the draw request is made (Eurozone–Sweden 2007). However, central banks in the Major Bank Swap Network all require at least one-day notice between the draw request or activation and the transaction date, with the exception of Japan, which has a two-day notice due to its time zone (Bahaj and Reis 2021).

In contrast, the process for approving and settling swap draws under multilateral facilities like the ASA and the CMIM may take considerably longer because multiple decision-makers are involved (see Key Design Decision No. 5, Administration). The decentralized financing structure of the ASA and CMIM requires that at the time of a draw, each lending central bank must commit to fund swaps with the borrower (ASEAN 2005; Han 2022). In the ASA, a borrower submitting a request had to set a transaction date at least seven days after the day of the request. If one of the 10 ASEAN central banks chose to opt out of the agreement, the transaction date was pushed back an additional seven days while the remaining central banks negotiated lending amounts (ASEAN 2005). Critics have argued that these timing delays and procedural frictions may have created the perception that the arrangement is not suited for urgent liquidity needs and may explain the lack of use of both facilities (Han 2022; Hoffner 2023a; Hoffner 2023b). The SAARC framework, also a regional lending facility, differs in that the RBI is the sole lender and in charge of governance and administration for the swaps. It is perhaps because of this centralized structure that scholarship has praised the SAARC framework for timely disbursals and low conditionality (Mühlich, Fritz, and Kring 2022).

Swap draws are typically approved by the highest-level governing body of the central bank, although we observe some limited delegation for efficiency purposes.

Although administrative functions are often delegated by the governing bodies to lower-level entities, swap draw/activation requests typically still require approval from the highest governing level of the lending central bank. For the Fed, this is the chair of the FOMC, or the entire Committee as specified in the Authorization; for the ECB, it is the Governing Council. Governance-level approval of draws provides the Lender another opportunity to review and confirm not just the broad terms of the swap or repo agreement but the specific proposed terms and surrounding conditions at the time of draw. This type of approval was used by most lending central banks among our cases: DNB, ECB, Fed, Norges Bank, PBOC, and Riksbank.

Some lending central banks delegate the approval of swap draws. Typically, such approvals remain at a similarly high level. For example, if the FOMC is not available to act, then a three-member subcommittee of its members can act in its place (FOMC 2021a). Similarly, it appears that the ECB has a practice of delegating authority for implementation decisions and swap draws to one member of the Executive Board, rather than requiring the entire body to act. We saw such wording in the Executive Board memoranda to the Governing Council addressing the arrangements with the DNB, MNB, and NPB (ECB 2008a; ECB 2008b; ECB 2008c).

In a few cases, central banks have delegated the authority to approve swap draws to lower-level bodies. For example, the Fed chair can preapprove a general schedule of swap drawings and delegate individual drawing approvals consistent with that schedule to the FRBNY (FOMC 2021a). Under the Fed swap line to Mexico in 1994, all draws were subject to approval by the FOMC. However, the Committee “activated” part of the line when approved, meaning that the Mexican central bank could immediately draw on it up to that limit without further FOMC approval (Fed 1995, 12). The Fed used this tactic again during the GFC. In December 2007, at the same time the FOMC approved a USD 20 billion swap line for the ECB, it preauthorized the ECB to draw up to USD 10 billion under the line. Draws in excess of that amount required additional FOMC approval (FOMC 2007b). In October 2008, the FOMC also preapproved drawings up to USD 5 billion for the four emerging market central banks (BCRA, Bank of Korea [BOK], Banxico, MAS), allowing them to draw this much without additional FOMC approval (FOMC 2008).

For the CMIM, a committee of the deputies of the ASEAN 3 central banks and finance ministries is responsible for approving draws under constraints (size limits, duration, renewals) set out in the agreement signed by the governors and finance ministers (AMRO n.d.).

Repos follow traditional processing procedures that facilitate efficient funding.

The ECB has not disclosed many details about the agreements entered into under the EUREP facility or how draws under this facility operate. However, for its bilateral repo arrangements with MNB and NBP, it uses a common agreement for financial transactions published by the Banking Federation of the European Union (EBF 2004), a Master Agreement for Financial Transactions, which it customizes (Gupta 2023a; Gupta 2023b). Use of a common form agreement indicates the parties’ intent to adopt common transactional practices that facilitate efficient processing. The agreement also indicates that that Deutsche Bundesbank, the German central bank, would be responsible for securities settlement and collateral management for the ECB (ECB and MNB 2008). In general, the Bundesbank received a request for a draw and processed both sides of the transaction by valuing the collateral, confirming transfer of the cash, and allocating to the ECB’s and Borrower’s respective accounts.

A borrowing central bank approved under the Fed’s FIMA Repo Facility can draw on the facility by sending a trade request to the FRBNY, which sends back a confirmation. Then, the Borrower sells the required Treasury collateral to the Fed in a repo transaction and the FRBNY moves the collateral from the Borrower’s custody account to the Fed’s portfolio account (Kelly 2023). After the collateral is received, the Fed sends the haircut-adjusted cash value of the securities to the Borrower (Choi et al. 2022). The FRBNY, rather than the triparty repo system (provided by Bank of New York Mellon in the US) or an outside vendor, is responsible for post-trade clearing, settlement, and collateral management (Choi et al. 2022). Using the Fed’s own systems rather a private market participant’s may be beneficial for maintaining confidentiality of Borrower activity (Potter 2017).

The predominate use of borrowed funds is for downstream liquidity provision to banks in the borrowing central bank’s jurisdiction. The lending central bank often informally influences the downstream use of funds by the borrowing central bank, and coordination between the lending and borrowing central banks is common.

In most cases, the borrowing central bank uses the funds to provide downstream liquidity in the foreign currency to banks in its jurisdiction at terms similar to the swap line. This has become one of the most predominate uses of swaps during the last two decades (McCauley and Schenk 2020) (see Key Design Decision No. 1, Purpose and Type).

Under the swap or repo agreement, the borrowing central bank typically has sole discretion over the use of currency borrowed through a swap. That was the case in 2010 when the BoE entered into a swap arrangement with the ECB to provide GBP 10 billion. That agreement did not limit how the funds could be used, but the ECB announced that the funds would be used only to provide liquidity to the CBIR to lend to its domestic banks (Wiggins 2023).

In an atypical situation, the medium-term swaps under the US–Mexico 1995 assistance package differed from the US’s previous assistance, which had been only short-term bridge funding to facilitate Mexico’s securing an IMF package. The 1995 package was intended to facilitate a more permanent solution for Mexico’s problems and specified that the proceeds were to be used to “restructure Mexico’s debt to longer terms” (Swaminathan and Wiggins 2023). To oversee this requirement, in addition to the FRBNY’s approving the typical transactional terms, any requested draws also had to be approved by the FOMC, which could query the Banxico’s intended use (Swaminathan and Wiggins 2023).

Specific restrictions on downstream use of drawn funds are rare. However, as a practical matter, the lending central bank can exercise some informal influence over intended uses by the Borrower because of its ability to deny requested draws, and the timing and terms of downstream facilities generally match the timing and terms of the swap transactions between the central banks.

Downstream facilities are typically structured as repos, providing liquidity in the Lender’s currency secured by collateral denominated in the Borrower’s currency. The Borrower determines eligibility, acceptable collateral, any haircut, and fees. It would typically demand the same high-quality collateral that it would demand in its other emergency liquidity facilities and apply similar haircuts (Bahaj and Reis 2018). There is no contractual relationship between the lending central bank and the downstream banks in the Borrower’s jurisdiction. From the lending central bank’s point of view, it has a mechanism to extend the reach of its currency to companies in the foreign jurisdictions without assuming the administrative duties or the risk of the foreign commercial banks.

The timing of the downstream repos generally matches the maturity of the swap draws. In our Eurozone–UK 2019 case, the connection between the BoE’s draws of euros under its standing swap line with the ECB and its weekly downstream lending of euros under its new Liquidity Facility in Euros (LiFE) program were obvious—the LiFE program was “facilitated by the activation of the standing swap line” (BoE 2019). This operation mirrored an existing weekly US dollar facility that relied on a similar swap arrangement between the BoE and the Federal Reserve (Swaminathan 2023a).

The parties often coordinate or cooperate on the use of borrowed funds. The Fed, in particular, has a history of coordinating the deployment of funds borrowed under its dollar-liquidity swap lines. In 1967, the Fed cooperated with the BIS, Deutsche Bundesbank, and other central banks to provide US dollar liquidity to European banks to address weaknesses in the Eurodollar market related to the drop in the pound sterling (Arnold 2023e).

In December 2007, the Fed set up its earliest GFC swap lines with the SNB and ECB, and the parties coordinated to provide US dollar liquidity overseas at terms similar to those of the Fed’s domestic Term Auction Facility (Runkel 2022). Fed officials believed using the complementary swap lines would help guard against spillover effects in American markets and reduce US dollar term funding pressures for European banks (French 2023b). The borrowing central banks worked closely with the Fed to structure downstream lending facilities for financial institutions in their jurisdictions (Fleming and Klagge 2010).

In the COVID-19 pandemic, the Fed enhanced its standing swap lines and established new temporary US dollar-liquidity swap lines. The borrowing central banks again used the proceeds of swap drawings to lend US dollars downstream to their domestic banks, conducting operations following a schedule preapproved by the Fed (Choi et al. 2022). The borrowing central banks determined the other terms of the downstream lending operations, including the method of allocation, eligible institutions, and collateral requirements (Bahaj and Reis 2020; Fed 2020c). Coordinating with borrower banks in this manner gave the Fed more control over the flow of US dollar liquidity and helped prevent arbitrage.

Most cases exhibited a similar connection between the swap line and the downstream lending facility (for example, Eurozone–Ireland and UK 2010 and Switzerland–Multiple 2008–09). The announcement of the swap or repo arrangement adds credibility to the borrowing central bank’s downstream lending facility by making it clear that it has an available supply of the needed foreign currency, as the MNB expressed in its discussions with the ECB prior to finalizing its repo arrangement; it expected a “positive signaling effect” from announcing the ECB arrangement (ECB 2008a, 2).

During the GFC, the ECB, MNB, and NBP offered Swiss francs to banks in their jurisdictions via weekly auctions that coincided with the SNB’s own swap auctions for banks that were its repo counterparties (Allen and Moessner 2010; SNB 2010b).

The duration of swap draws and repos is usually set out in the governing agreement or framework and in our cases varied from overnight to 95 days. The parties agree on the actual duration of each draw or repo at the time it is made. Draws also may be rolled over for longer periods.

Swap and repo agreements usually address the duration of drawings by (i) setting a specific maturity for swap draws (for example, “30 days”), (ii) setting a maximum term for the draw (for example, “of not more than X days”), or (iii) providing that the parties will agree on the duration at the time of the draw. Most swap and repo agreements utilize one of these mechanisms, allowing the parties to agree on the actual terms at the time of the draw. We also see central banks setting a duration administratively before actual draws are made.

The initial periods of actual draws ranged from overnight to 95 days (this excludes swaps with longer maturities found in Asia and Latin America; see Figure 10). However, it is useful to note that some swap and repo lines do allow draws to be rolled over, extending the actual length of the draw.

In some cases, the two central banks tailored the durations of their swap draws to fit the needs of the situation at hand. For instance, the agreements of the Fed’s standing dollar swap lines with major central banks specify that the parties will agree on the swap duration when negotiating a draw (FRBNY n.d.c). Typically, the Fed provides swap draws of seven-day maturities to match the maturities of corresponding downstream dollar auctions. During crises, like the SDC or the COVID-19 pandemic, the Fed’s swap lines provided 84-day maturities as major central banks announced the addition of 84-day maturity downstream US dollar operations (Fed 2020a; FRBNY 2021).

Liquidity constraints are often characterized by shortened maturities. In a prolonged crisis such as the GFC, lengths of draws may be extended in response to such market conditions. During the GFC, draws by various central bank counterparties under the Fed’s swaps ranged from one to 95 days (French 2023b). Initially, the Fed and counterparties coordinated the downstream lending made possible by the swaps with the Fed’s domestic lending under the Term Auction Facility (French 2023b; Runkel 2022). Original terms were 28 days, and then the Fed authorized 84-day draws; several foreign central banks also began to extend longer-term US dollar loans in their downstream lending (French 2023b; Runkel 2022). The borrowing central banks first lent the drawn funds in one-month and three-month fixed-rate auctions at the lowest rate at which bids were accepted in the most recent TAF auctions. Starting in October 2008, when the Fed removed the size limits on its swaps with major European central banks and the BOJ, those central banks primarily lent drawn funds to banks in fixed-rate tenders with full allotment at one-week, one-month, and three-month maturities, at rates no longer tied to the rates under the TAF (Fleming and Klagge 2010).

The SAARC framework provides swap draws with an initial maturity of three months. Each swap draw can be rolled over twice (RBI 2012). Under the framework, the interest rate charged was the London Interbank Offered Rate (LIBOR) plus 200 bps for US dollar and euro swaps, and the RBI repo rate minus 200 bps for Indian rupee swaps (RBI 2012). At the second rollover of the swap, the interest rate would increase by 50 bps over the previously charged interest rate (Gupta 2023e; RBI 2012).

Note: Fed/UST: Federal Reserve/US Treasury; UST: US Treasury: NAFA: North American Framework Agreement; TSL: Temporary Swap Line; AP: assistance package of 1995.

Sources: Authors’ analysis; Arnold 2023b (b); Arnold 2023c (c); Fed n.d.b. (e); Hoffner 2023b (a); Horn et al. 2023 (c); Swaminathan and Wiggins 2023 (d).

The parties agree on the exchange rates, determined by prevailing spot rates, at the time of the swap draw. There is no direct exchange rate risk because the spot and forward rates under a swap draw are the same, excluding interest.

Note: Fed/UST: Federal Reserve/US Treasury; UST: US Treasury: NAFA: North American Framework Agreement; TSL: Temporary Swap Line; AP: assistance package of 1995.

^A Information given refers to the 2005 memorandum of understanding.

^B The CMIM uses the six-month term Secured Overnight Financing Rate plus a spread adjustment of 0.428% as the reference rate. The CMIM adds to the reference rate an initial premium of 150 bps, which increases by 50 bps for additional renewals up to a maximum premium of 300 bps.

^C SNB swap transactions use the same exchange rate for the spot and forward rates but with a discount or premium to account for the spread between the interest rates on the two currencies, called the swap points. In effect, the borrowing central bank pays the rate of interest on the currency they borrow and receives the interest rate on the currency they lent in exchange. So, the spot exchange rate was the market spot rate, but the forward exchange rate was the spot exchange rate /- forward swap points.

^D Actual interest rates were based on downstream auction results. The Fed’s counterparty central banks with temporary swap lines would provide dollars in their jurisdictions through competitive auctions and remit the proceeds to the Fed; as a result, the interest paid typically settled higher than the minimum OIS 25 bps rate.

Sources: Authors’ analysis; French 2023a (c); Hoffner 2023b (b); Hoffner 2023d (d).

Under swap arrangements, Lenders are protected by holding the Borrower’s currency as collateral; they do not transact directly with downstream foreign financial institutions. However, Lenders can take further steps to protect their balance sheets by including set-off provisions, customizing collateral requirements, or requiring that additional terms be met for a draw.

Central banks protect themselves with set-off rights, which can be plain vanilla or enhanced, permitting access to assets beyond the swap arrangement in the event of default.

Although the lending central bank faces limited credit risk because its counterparty is the borrowing central bank, it may still consider there to be some risk and try to mitigate it. One mechanism lending central banks use to protect against such an occurrence when providing some economic relief is to include a set-off clause in the swap or repo agreement.

A typical set-off clause gives the lender the right to seize assets of a defaulting party that it holds and deduct from such assets (set off) any amounts that are owed by the defaulting party, providing the Lender some economic relief and avoiding the situation where it has not been paid but would have to pay amounts or return assets to a defaulting party (Kagan 2020). In swap agreements between the Fed and the central banks of the Major Bank Swap Network, the scope of the set-off provisions is limited to defaults under the agreement and swap related assets under the agreement, and are mutual.^FN“In the event a party fails to fulfill its obligations under this Swap Agreement with respect to a particular Swap transaction on the applicable Maturity Date, the non-defaulting Party is authorized to set off any obligations they may owe the defaulting Party against the currency held by the non-defaulting Party pursuant to this Swap Agreement” (FRBNY 2011a; FRBNY 2011b, para. 5(a). (See, for example, the Fed’s agreements with the BOJ and the SNB [FRBNY 2011a; FRBNY 2011b].) For example, if a Borrower were to default on paying interest owed at the end of a swap draw, the Fed could deduct the amount of interest from the currency collateral before returning it.

Transcripts from FOMC meetings during the GFC provide additional insight into how Fed officials evaluated the risks of each counterparty central bank. In October 2008, the Fed discussed at length the approval of the last four central bank swap lines, to Brazil, Korea, Mexico, and Singapore. According to the transcripts, unlike the swap lines with major central banks, the Fed included enhanced, broad, set-off rights in these four swap arrangements. In the event of a default, the Fed would be able to not only seize the currency collateral but also take any assets of the defaulting central bank held at the FRBNY to satisfy amounts owed under the swap arrangement (FOMC 2008). As described by then–FRBNY President Timothy Geithner, these broad rights added valuable security to the arrangement for the Fed:

It is unclear whether or not these set-off rights, discussed in 2008, applied to the COVID-19-era swap lines. However, it is notable that although the Fed does disclose the complete agreements embodying the standing swap arrangements with major central banks, its policy is to not disclose the legal agreements for its temporary USD swap agreements (FRBNY n.d.b).

The US used a more robust set-off mechanism under the USD 20 billion 1995 assistance package to Mexico. The Mexican government was required to deposit revenues from oil exports and certain other amounts into an account at the FRBNY to which the Fed had certain set-off rights. Under the contemporaneous Oil Proceeds Facility Agreement, which was to remain in place until Mexico had satisfied all its obligations under any component of the 1995 package (short-term swaps, medium-term swaps, guarantees), if at any point Mexico defaulted on any of its obligations, the FRBNY could access such funds to satisfy the obligations (US Treasury 1995). See Swaminathan and Wiggins (2023) for more discussion of these and other protective elements.

Central banks may protect themselves by requiring a third-party currency as collateral from the borrowing central bank or by entering into a repo arrangement and accepting securities denominated in its currency, instead of the borrower’s currency, as collateral.

Central banks usually choose to forego swap arrangements with central banks from countries whose currency they do not wish to accept as collateral. During the GFC, the Fed declined to enter into swaps with seven countries that requested them.^FNSahasrabuddhe (2019) has identified seven central banks that requested swap lines during the GFC but which the FOMC declined: Chile, the Dominican Republic, India, Iceland, Indonesia, Peru, and Turkey. However, if the lending central bank does wish to enter into a swap agreement with a country whose currency it does not wish to accept, it has the option of requiring as collateral a currency other than that of the Borrower, usually an easily convertible currency from an advanced economy. The SNB did this under its GFC swap agreements with the NBP (2008) and the MNB (2009); it accepted only euros, not złoty or forints, in exchange for Swiss francs (French 2023a).

A central bank can also choose to enter into a repo agreement, which requires securities as collateral rather than currency. The ECB chose to enter into bilateral repo arrangements rather than the requested swap arrangements with the MNB and NBP, non–euro area countries. Under these agreements, the ECB accepted only certain euro-denominated government securities as collateral, the scope of which was separately negotiated with each party (Gupta 2023a; Gupta 2023b). In March 2020, the ECB again entered into several bilateral repo arrangements with non–euro area countries accepting only highly rated euro-denominated government securities (ECB 2022c).

The recently adopted EUREP and FIMA repo frameworks provide the ECB and Fed additional options in this regard. While the FIMA framework has standardized terms regarding collateral (accepting only US Treasuries), the EUREP framework allows the ECB to individually negotiate terms with each counterparty, but the ECB has stated that the range of collateral is narrower than for a bilateral repo line (Arnold 2023d; Kelly 2023). (See Key Design Decision No. 1, Purpose and Type.)

Central banks can protect themselves by further securing the value of collateral currency with a top-up clause.

If there is some risk that the borrowing central bank’s currency may be devalued over the life of the draw, the lending central bank can include a “top-up clause” that requires the Borrower to deposit additional collateral with the Lender if the value of its currency decreases against the borrowed currency. The United States included this type of provision in its medium-term swap line with the Mexico in 1994, which allowed for longer than usual maturities of up to five years. Mexico bore any exchange rate risk, protecting the US from losses on movements in the prevailing exchange rate (Clinton 1995). The parties calculated the applicable exchange rate on a quarterly basis and, in the event of an unexpected appreciation of US dollars against pesos, Mexico would have to adjust the peso collateral to reflect the prevailing exchange rate (Clinton 1995). The ECB included similar clauses in its GFC-era bilateral repo agreements with MNB and NBP (Gupta 2023a; Gupta 2023b). However, most swap agreements do not contain such a top-up clause.

Central banks protect themselves by having the fiscal authority guarantee swap transactions.

When the US extended swap assistance to Mexico in 1982 and 1994, the swaps were partially funded by the Fed and partially by the Treasury. The swap arrangements also permitted longer than usual maturities, up to three months under the joint Fed-Treasury swaps in 1982 and up to five years under the 1995 US Treasury swaps from the multilateral assistance package. In both instances, there were questions about whether Mexico had sufficient collateral to support the swap line. FOMC minutes also reveal that the Committee had some concern that it was being asked to perform quasi-fiscal actions (FOMC 1994). Therefore, in 1982, the Treasury guaranteed the Fed drawings of three months, and in 1995, it guaranteed drawings that were outstanding for more than 12 months (Swaminathan 2023b; Swaminathan and Wiggins 2023; US General Accounting Office 1996).

Central banks can protect themselves by requiring additional administrative requirements to draw under the swap arrangements or by applying additional limitations and scrutiny to each draw.

The lending central banks in our cases used a variety of other mechanisms to minimize risk under swap and repo arrangements and protect their balance sheets. These efforts included: limiting the amounts that could be borrowed without additional review; requiring that the Borrower maintain additional collateral at the Lender; shrinking the amount permitted to be borrowed under the arrangement as it was used; and requiring additional commitments from the Borrower’s fiscal authority regarding use of funds or fiscal integrity, adherence to certain additional financial standards, and the production of a certification from a third party such as the IMF.

For example, as part of a request for a swap draw under the ASEAN network, the member must attach an assessment of its domestic economic situation and balance of payments outlook (ASEAN 2005; Hoffner 2023a). The Agent Bank (the ASA administrator) must confirm satisfaction of this requirement and coordinate processing the request among network members (Hoffner 2023a).

Although designed to further protect the Lender, there is no guarantee that the Borrower will adhere to such additional conditions. A Lender can protect itself in the event that the Borrower does not comply, however, by retaining the option to not approve a requested draw in such circumstance. For example, under the Scandinavia–Iceland swaps, the Icelandic government made certain commitments to the Lenders in support of the swaps, and the CBI was required to update them on the government’s adherence to the commitments. The then–governor of the Riksbank, Stefan Ingves, who was present at the negotiations over the swap lines, likened these swap conditions to that of an IMF program, saying: “It was almost as if it was designed as an IMF program without the IMF.” (Ingves 2022, 10).  When the CBI sought to draw under the lines, the DNB and Norges Bank approved the draw, but the Riksbank did not because it felt the Icelandic government had not delivered on its commitments (Hoffner 2023c).

In a typical swap, there are no formal restrictions on the downstream use of borrowed funds.

Typically, the use of funds drawn under a swap is at the discretion of the borrowing central bank. However, in several cases, the lending central bank imposed informal restrictions on the downstream usage of borrowed funds through its ability to approve swap draws. See Key Design Decision No. 10, Downstream Use of Borrowed Funds.

Lending central banks often prioritize swap arrangements over other alternatives owing to their ability to efficiently address international liquidity issues with minimal risk.

For lending central banks, swap arrangements are an efficient way to provide liquidity in their currencies to foreign jurisdictions with limited risk. While direct lending to foreign commercial banks could be an option, the Lenders would be exposed to foreign counterparty credit risks that are better managed and assessed by the borrowing central banks.

Repo arrangements, such as the ECB’s bilateral repos and EUREP facility and the Fed’s FIMA Repo Facility, are an increasingly popular alternative to swaps. These arrangements address the lending central bank’s dilemma of providing liquidity abroad while being cautious about accepting the counterparty’s currency as collateral due to potential sovereign default risks.

Borrowers with ample foreign currency reserves may be able to meet their own liquidity needs. Even if the borrowing central bank has substantial reserves, though, it may not wish to use them for its liquidity needs. This was a sentiment expressed by the MNB in its discussions with the ECB regarding the 2008 repo arrangement between the parties. The MNB specifically indicated that it would use the facility as a mechanism of “first resort” and would draw on the facility before using its euro reserves (ECB 2008a; MNB 2008). Still, as central banks typically hold reserves in government securities, even those countries may prefer to use an international repo facility to access liquidity without disrupting the global market for those securities.

Borrowers without sufficient reserves to cover their domestic banks’ foreign currency liquidity needs may also have difficulty securing reserve currency swap arrangements and so look to the IMF’s Short-term Liquidity Line and Flexible Credit Line (Hoffner 2023c; Negus 2020). (See Key Design Decision No. 7, Eligible Institutions.)

Swap agreements tend to have lifespans of 30 days to three years, with arrangements entered into for liquidity provision having shorter lifespans. Standing agreements, those without end dates, seem to occur only between advanced-economy countries.

Notes:Quoted text in this table comes from the original underlying agreements. Fed/UST: Federal Reserve/US Treasury; UST: US Treasury: NAFA: North American Framework Agreement; TSL: Temporary Swap Line; AP: assistance package of 1995.

^A It is not clear if this arrangement was continuously in place from its origin in 2008. However, the ECB and DNB “reactivated” the line on March 20, 2022, and the ECB characterized it as a standing arrangement on its website.

^B According to the Central Bank of Ireland’s annual report, between the signing of the agreement in December 2010 and annual report’s publication on May 20, 2011, one credit institution had used the downstream facility.

^c On March 15, 2020, the Fed and the five central banks with standing US dollar swap lines announced enhancements to these lines that would go into effect for the swap operations during the week of March 16, 2020. The first drawings under the new enhancements settled on March 19, 2020.

Sources: Authors’ analysis; CBIR 2011 (b); Fed n.d.b. (c); Fed 2020a (c).

Swap arrangements without stated termination dates were terminated through (a) deactivation, (b) pricing mechanisms, or (c) conversion to standing arrangements.

Using a fixed termination date for a swap arrangement is the most common exit strategy we observed among our swap lines and is particularly common for arrangements put in place to address perceived or occurring liquidity constraints. Deactivation of a standing swap line means that the use of the facility ceases but the facility continues to exist; it remains dormant until the next usage or activation. In deactivating a standing swap line, the parties simply announce that funding will be available until a certain date and then take no more action. For example, in 2021, the central banks of the Major Bank Swap Network wound down the frequency and tenure of swaps available under their lines.^FNThe Fed’s temporary swap lines with the BoC, BoE, BOJ, ECB, and SNB were deployed in 2010 during the Sovereign Debt Crisis and converted into standing swap lines in October 2013, forming the Major Bank Swap Network. (See Hoffner 2023d).

In several cases, the parties used pricing as a natural exit mechanism. Lenders typically pegged swap rates to the Lender’s policy rate, or a similar benchmark rate plus a margin, consistent with Bagehot’s dictum urging central banks to lend freely but at a penalty rate (Bagehot 1873; Bahaj and Reis 2021; Tucker 2009). The penalty encourages banks to stop using swaps when a crisis ends, to avoid crowding out private market alternatives under normal market conditions (Choi et al. 2022). This exit mechanism is particularly relevant for standing swap lines such as the Major Bank Swap Network that have no set expiration date. For the Fed’s standing swap lines, borrowing central banks may request swaps at any point. In practice, however, US dollar swap usage has remained almost entirely confined to periods of acute stress (for example, during the Sovereign Debt Crisis and COVID-19 pandemic) (Bahaj and Reis 2020). The ECB and Fed have both said that the rates charged under their framework repo facilities (EUREP and FIMA, respectively) are generally above private market repo rates that prevail in normal times, intending for the facility to be used in periods of market stress but not as markets recover (Arnold 2023d; Fed 2020e). The former head of the FRBNY’s Markets Group, Daleep Singh, explained: We made sure the pricing of these facilities was set at a backstop rate, such that they would self-liquidate when market conditions normalized, and also to ensure that we weren't creating adverse pricing for domestic actors relative to international institutions (Singh 2023).

Finally, in some cases, the central bank converted a temporary swap arrangement into a standing arrangement rather than terminate it. Standing swap lines are valuable because they remain available for reactivation or targeted use on short notice (see Key Design Decision No. 1(B), Purpose and Type). One case in point is that during the banking stresses of March 2023, the six central banks of the Major Bank Swap Network again took coordinated action to improve the provision of US dollar liquidity. Those banks that had weekly downstream dollar auctions increased them to daily operations, and those without operations implemented them so the weekly auctions began on the same day (BBC News 2023).