Switzerland: Central Bank Swap Line to the Eurozone, Poland, and Hungary, 2008–2009

The SNB provided Swiss franc liquidity to the ECB, NBP, and MNB, which were then able to offer the funds to banks in their jurisdictions via weekly auctions that coincided with the SNB’s own swaps to domestic and foreign banks that were its normal repo counterparties (Allen and Moessner 2010; SNB 2010b). The SNB’s goal in establishing the swap lines was to supply Swiss franc liquidity to banks operating outside Switzerland that had Swiss franc funding needs. The SNB intended for the swaps to meet the strong foreign demand for Swiss francs and to address the illiquidity in the international Swiss franc money market. Central and Eastern European banks in particular had extended a significant number of loans in Swiss francs that they had financed by borrowing short-term from Swiss banks. When the Swiss banks pulled their funding during the financial crisis, many European banks, especially smaller Eastern European ones that generally had less involvement in Swiss payment systems, did not have access to the SNB’s domestic crisis-era liquidity operations (Andries, Fischer, and Yesin 2014). A few large Western European banks had accounts with the SNB and could access Swiss franc liquidity directly, while the Eastern European banks that had financed Swiss franc mortgage loans and were now facing liquidity issues were less likely to have access to the SNB’s operations. The swap lines allowed the SNB to have a central bank as its counterparty in each transaction, and that central bank could then allocate the Swiss franc liquidity and take on the risk of dealing with local banks. That structure helped with providing liquidity to banks with lower credit ratings than the SNB would want to transact with directly.

The SNB relaxed monetary policy early in the crisis and then turned to offering more longer-term repos, purchasing Swiss franc bonds issued by the private sector and buying foreign currency via the open market (IMF 2009). The SNB also stepped in to provide financing for the transfer of illiquid assets from UBS, a large Swiss bank with global operations, to a special purpose vehicle. Additionally, the central bank lent Swiss francs in exchange for euros to eligible commercial banks^FNSee Key Design Decision No. 5, Administration, for more information on bank eligibility for SNB foreign exchange swaps. (SNB 2008a). The SNB held its own euro–Swiss franc swap auctions for domestic and foreign banks in addition to having the swap lines with the ECB, NBP, and MNB (SNB 2009a; SNB 2009b).

Article 9, Paragraph 1 of the National Bank Act gives the SNB the ability to use spot and forward foreign exchange transactions and currency swaps (SNB 2003; SNB 2010b).

The SNB’s supervisory and executive bodies are the Bank Council and the Governing Board. The Bank Council oversees and controls business at the SNB, while the Governing Board is responsible for monetary policy, asset management strategy, international monetary cooperation, and the stability of the financial system, as well as representing the bank to the public (SNB n.d.b; SNB n.d.c). The SNB’s press releases and annual reports do not specify which body had to approve the swap lines, but members of the Governing Board were listed as signees to the October 15, 2008, amendment to the SNB-ECB swap arrangement (ECB and SNB 2008; SNB 2008c).

The SNB reported the swap lines in its annual reports but provided only the aggregate usage numbers across the three borrowing central banks (Andries, Fischer, and Yesin 2014; SNB 2010b). The ECB’s 2009 annual report discussed the swap line with the SNB and the Eurosystem’s downstream foreign exchange swaps and mentioned that the Eurosystem conducted 51 Swiss franc–providing operations at seven-day maturities during 2009, consistent with the weekly auction schedule described in the press releases (ECB 2010). The NBP reported on downstream lending in its annual report (NBP 2010). The MNB discussed the swap agreement and the downstream lending in its annual report (MNB 2010).

When the SNB first announced its swap agreement with the ECB, it said the SNB and ECB would provide Swiss francs to euro-area financial institutions in return for euros. The press release noted that the two central banks had entered into a swap arrangement through which the ECB would access Swiss francs to lend to euro-area banks (SNB 2008c).

For the Poland and Hungary press releases, the SNB announced swap lines with each central bank and said that the NBP and MNB would join the weekly foreign exchange swap operations “conducted under the umbrella of the SNB” (SNB 2008d; SNB 2009a). The MNB said the swap agreement enabled it to provide Swiss franc liquidity through the one-week maturity swap tenders (MNB 2010).

In October 2008, the SNB issued instruction sheets for participation in the bank’s domestic weekly auctions (SNB 2008a; SNB 2008b). The SNB’s auctions were accessible by its normal commercial repo counterparties (Allen and Moessner 2010).

The ECB offered its downstream foreign exchange swaps via fixed-price auctions that were open to counterparties eligible for US dollar foreign exchange swap tenders or that were eligible under Annex 3 of the General Documentation on Eurosystem Monetary Policy Instruments and Procedures (ECB 2008a). The 2006 version of that document describes the selection as mainly being based on prudence and efficiency (ECB 2006). Those categories included creditworthiness of, quality of information provided by, and reputation of the potential counterparty. While the ECB’s instruction sheet specifies a minimum bid of EUR 1 million, there was no maximum bid given. The ECB’s annual report states that the maximum allotment amounts for the downstream auctions were determined by the ECB in coordination with the SNB (ECB 2010).

The ECB’s 2008 annual report stated that the ECB drew Swiss francs from its swap line and simultaneously entered into swaps with national central banks (NCBs) of the Eurosystem. Those NCBs then used the funds to provide Swiss franc liquidity against euros to euro-area financial institutions (ECB 2009). The weekly downstream swap offerings allowed one set of rules to apply to the entirety of the Eurosystem and leveraged the NCBs as administrative entities (ECB 2008a).

In 2009 the NBP’s downstream foreign exchange swaps were offered weekly, at seven-day-maturity, and in Swiss francs for Polish zloty, US dollars for Polish zloty, or euros for zloty. The Swiss-franc-for-Polish-zloty swaps saw the highest demand from banks (NBP 2010).

The MNB offered seven-day-maturity Swiss-franc-for-euro swaps to its domestic institutions. The MNB also offered euro-for-Hungarian-forint swaps to provide liquidity domestically in euros with terms of three and six months (MNB 2010).

On its balance sheet, the SNB reported collateral from the 2008 and 2009 swap arrangements under “balances from swap transactions against Swiss francs” (SNB n.d.a; SNB 2022).

The SNB announced the swap lines via press releases with each release also announcing downstream foreign exchange swaps (SNB 2008c; SNB 2008d; SNB 2009a).

The press release language, particularly with the SNB and ECB agreement, emphasized the close collaboration between the central banks with statements like “the Swiss National Bank (SNB) and the European Central Bank (ECB) are jointly announcing measures to improve liquidity.” In the same press release that the SNB announced the revised swap agreement with the ECB, it also announced that the SNB and the Eurosystem would together offer Swiss franc–euro swaps to euro-area banks in a weekly foreign exchange swap facility (SNB 2008c). The ECB and MNB issued press releases announcing their respective swap agreements around the same time as the SNB, while the NBP’s press release is dated about two months after the SNB announcement, when the arrangement was already underway (ECB 2008b; MNB 2009a; NBP 2009).

The SNB’s press release announcing the swap line with the ECB mostly contained details on the downstream lending, including the rates that would be used for the swap points^FNGenerally, swap points, also referred to as “forward points” or the “forward spread” are the number of basis points added to or subtracted from the spot rate to determine the forward rate for a specific date in the future (Chen 2020). on the downstream activities^FNThe press release described the swap points as being “calculated using the rate applied in main refinancing operations of the ECB and the SNB 1-week repo rate plus 25 basis points” (SNB 2008c). (SNB 2008c).

The four central banks also jointly announced the end of the downstream foreign exchange swaps (SNB 2010a).

The swap lines were between the SNB as the lending bank and the ECB, NBP, and MNB as borrowing banks (SNB 2010b). The line with the ECB was launched in October 2008 alongside the launch of the SNB’s domestic Swiss franc lending facility and the ECB’s downstream lending (SNB 2008c). The NBP swap was launched in November 2008, and the MNB swap was launched in February 2009 (SNB 2008d; SNB 2009a).

Some foreign banks participating in the SNB’s repo operations could access Swiss franc liquidity directly from the SNB through Swiss-franc-for-euro foreign exchange swap operations (SNB 2008a). The SNB entered into the swap agreements with the ECB, NBP, and MNB to enable those central banks to extend Swiss franc liquidity to financial institutions within their jurisdictions that had Swiss franc funding needs (SNB 2008c; SNB 2008d; SNB 2009a).

There was no specified size for the central bank swap lines. The earlier 2003 swap agreement between the ECB and SNB that the 2008 agreement amended did provide a maximum size of EUR 10 billion for the amount of euro liquidity that the SNB could access (ECB and SNB 2003).

For the ECB’s downstream lending, the foreign exchange swaps were offered with maximum amounts of EUR 20 billion for seven-day operations and EUR 5 billion for 84-day operations. The ECB said in its annual report that it determined the size of the swaps in coordination with the SNB (ECB 2009). If the aggregate amount of bids exceeded the allotted amount, the SNB and ECB would allocate swaps to banks on a pro rata basis (SNB 2008c).

The MNB reported that its Swiss-franc-for-euro swap tenders for its domestic banks had maximum amounts of EUR 5 billion per week for seven-day maturity operations (MNB 2010). The NBP did not report a maximum size for its weekly Swiss-franc-for-Polish-zloty auctions targeting domestic banks in its annual report (NBP 2010).

Under the October 2008 amendment to the January 2003 SNB and ECB swap agreement, the parties had to mutually agree to enter into swap transactions. The amendment specifically allowed the ECB to buy Swiss francs from the SNB in exchange for euros and simultaneously enter a forward transaction to sell back the Swiss francs on a maturity date specified upfront (ECB and SNB 2008).

When one of the foreign central banks wanted to draw on its swap line, it would place a bid at the SNB’s auction. After the two parties agreed to initiate a draw, the central banks would agree to the amount, value date, exchange rate, maturity date, applicable interest rates, and applicable swap points. On the value date, the Swiss francs would be credited to the ECB’s account at the SNB and the euros would be credited to the SNB’s account at the ECB. On the maturity date, the euros were then repaid including any interest to the ECB through the SNB’s account (ECB and SNB 2008). The difference between the exchange rate used on the value date and the maturity date reflected the forward points or swap points.

The ECB, NBP, and MNB offered Swiss franc funds 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 swap agreements did not govern the downstream operations, and the borrowing central banks were largely responsible for allocating the Swiss francs.

The ECB provided one-week and three-month Swiss franc funding to banks in its jurisdiction by drawing Swiss francs from its swap line and simultaneously entering into swaps with the NCBs (SNB 2008c). Those NCBs then used the funds to provide Swiss franc liquidity against euros to euro-area financial institutions (ECB 2009).

Under the SNB’s swap lines, the central banks of Poland and Hungary had to swap euros for Swiss francs rather than their local currencies (SNB 2008d; SNB 2009a). The NBP lent Swiss francs to banks in its jurisdiction in return for zloty. The MNB lent Swiss francs to banks in return for euros, although there’s no information regarding whether or not that was required by the SNB. The MNB would only accept euros from commercial financial institutions, whereas NBP accepted Polish zloty in exchange for euros. However, Hungarian banks could access euros through euro–Hungarian forint swaps offered by the MNB (MNB 2010). The MNB and NBP also had repo agreements with the ECB (ECB 2009).

The NBP’s 2009 downstream foreign exchange swaps were offered weekly, at seven-day-maturity, and in Swiss francs for Polish zloty, US dollars for zloty, or euros for zloty (NBP 2010). The NBP also offered US dollars for zloty and euros for zloty on a monthly basis with a 28-day maturity. The MNB offered seven-day-maturity Swiss-franc-for-euro swaps on their domestic markets (MNB 2010).

The SNB’s swaps with the three central banks initially all had a one-week duration. The ECB later introduced a three-month (84-day) swap to address “tensions in this segment of the Swiss franc money markets” (ECB 2009).

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 (SNB n.d.a). In the ECB swap line, the agreement 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. Once the SNB and ECB agreed to a drawing, they would agree to the exchange rate and fees, along with other specifics (ECB and SNB 2008). Documentation was not available for the swap lines with the NBP or MNB, but their press releases noted that their Swiss franc auctions would also be based on fixed prices, similar to the SNB-ECB arrangement.

If the ECB failed to repay any amount of Swiss franc on the maturity date, the unpaid amount maturing on that date would be rolled over into a new overnight swap, and the ECB would credit the SNB account with that amount in euros. The two central banks would mutually agree to the interest rate and exchange rate for the roll-over draw (ECB and SNB 2008).

The documentation doesn’t reveal other restrictions.

In December 2008, the four economies with the largest Swiss franc shortages according to the “net outstanding Swiss franc cross-border claims” measure were the euro area, Poland, the United Kingdom, and Hungary, in that order. The SNB extended Swiss franc swap lines to the euro area, Poland, and Hungary, but not to the United Kingdom (Allen and Moessner 2010).

The initial swap agreement with the ECB said the measure would be in place “as long as needed, at least until January 2009” (SNB 2008c). In January 2009, the SNB and MNB announced their swap agreement (SNB 2009a). The agreements between the SNB and the ECB, NBP, and MNB were then extended in April, June, and September of 2009 (MNB 2009b; MNB 2009c; MNB 2009d). The SNB, along with the three borrowing central banks, announced on January 18, 2010, that because conditions in the Swiss franc funding market had improved and the demand for liquidity had declined, the last downstream foreign exchange swap operation would be conducted on January 25, 2010. The press release said banks domiciled in Switzerland could continue to access Swiss franc liquidity through the Swiss franc repo system and the interbank market (SNB 2010a). The SNB’s 2010 annual report confirmed that the swap arrangements ended in January 2010 as well (SNB 2011).