Federal Reserve Forms Currency Swaps with 9 Central Banks
Posted on 03/20/2020
The Bank for International Settlements (BIS) estimates that banks outside of the United States have over US$ 13 trillion in U.S. dollar-denominated assets. U.S. dollar funding is essentially for the world economy to run.
On March 19, 2020, the Federal Reserve announced the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with the Reserve Bank of Australia, the Banco Central do Brasil, the Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Norges Bank (Norway), the Reserve Bank of New Zealand, the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden). These facilities, like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad. These U.S. dollar liquidity arrangements will be in place for at least six months.
New Banks Being Added
These new facilities will support the provision of U.S. dollar liquidity in amounts up to US$ 60 billion each for the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, the Monetary Authority of Singapore, and the Sveriges Riksbank and US$ 30 billion each for the Danmarks Nationalbank, the Norges Bank, and the Reserve Bank of New Zealand.
The Federal Reserve also has standing U.S. dollar liquidity swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.
U.S. Dollar Shortage
The Federal Reserve is trying to mitigate the U.S. dollar shortage, as U.S. banks are cutting down on risk. U.S. financial mega banks, Japanese banks, Japanese insurance companies, Chinese and Hong Kong banks, large state-owned oil companies, reinsurance companies, Asian insurance companies that hedge U.S. dollar bonds, and emerging markets (example: Turkey) with U.S. dollar domestic banking systems are major balance sheets outside of the United States that run on U.S. dollars.
Keywords: Federal Reserve System.
