The Federal Reserve’s mission includes promoting the health of the US economy and the stability of the US financial system. One way the Fed accomplishes this is through standing liquidity swap lines with several foreign central banks. Swap transactions are designed to support financial stability by improving liquidity conditions in dollar funding markets at home and abroad. How do these transactions work and how often are they used?
The FRED graph above shows the weekly dollar amount of central bank liquidity swap transactions between the Federal Reserve and authorized foreign central banks between mid-December 2002 and mid-October 2023. The data are reported in the H.4.1 release from the Board of Governors of the Federal Reserve System.
As described by the Board of Governors, a swap involved two transactions:
“When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.”
The noticeably large spikes in the data correspond to time periods when international dollar liquidity was strained due to heightened uncertainty: during the Great Recession of 2007-2009, during the European sovereign debt crisis of 2011, and during the COVID-19-induced recession of 2020.
The Federal Reserve operates these swap lines under the authority of section 14 of the Federal Reserve Act and in compliance with authorizations, policies, and procedures established by the Federal Open Market Committee.
How this graph was created: Search the alphabetical list of FRED releases for “H.4.1 Factors Affecting Reserve Balances” and select “Table 1. Factors Affecting Reserve Balances of Depository Institutions Wednesday Level.” Select the data series “Central bank liquidity swaps.”
Suggested by Diego Mendez-Carbajo.