Central Bank Swap Line
A central bank swap line is a standing agreement under which one central bank lends its currency to another in exchange for the borrower's currency, so the borrower can supply foreign-currency funding to banks in its own jurisdiction.
Also called: swap line · swap lines · central bank liquidity swap · dollar swap line · currency swap line
The US Federal Reserve's dollar lines are the most important. When a foreign central bank draws, the Fed credits it with dollars and receives the equivalent in the foreign currency at the market rate. The foreign central bank lends the dollars to its local banks and bears the credit risk on them. At maturity the exchange is reversed at the same rate, with interest paid to the Fed.
The lines exist because banks outside the United States owe large amounts of dollars but cannot borrow from the Fed directly. In 2008 and again in March 2020, private dollar funding through FX swaps became scarce and expensive, and the swap lines supplied the dollars instead. The Fed has permanent lines with the central banks of Canada, the United Kingdom, Japan, the euro area and Switzerland, and has opened temporary ones with others in crises.
Access is selective. Countries without a line must rely on their own reserves or on repo facilities that require US Treasury securities as collateral. China's central bank runs its own network of renminbi swap lines, used partly to support trade settlement in its currency.
Commonly confused with
| Term | How it differs |
|---|---|
| FX swap | An FX swap is a market transaction between private parties. A swap line is an arrangement between two central banks, used as a backstop when the market fails. |
See also
- FX SwapAn FX swap is a contract in which two parties exchange two currencies today and agree to reverse the exchange on a set future date at a rate fixed now. In economic terms it is a loan of one currency secured by another.
- Cross-Currency BasisThe cross-currency basis is the extra cost, or saving, of borrowing one currency through the FX swap market compared with borrowing it directly. A negative dollar basis means dollars are scarcer and dearer offshore than interest rates alone imply.
- EurodollarA Eurodollar is a US dollar deposit held at a bank outside the United States, or at an offshore unit of a US bank. Eurodollars are created by bank lending abroad and sit largely beyond US banking regulation; they have nothing to do with the euro.
- Central BankA central bank is the public institution that issues a country's currency, sets monetary policy, holds its foreign exchange reserves and acts as banker to commercial banks and the government. Most also run the core payment system and lend in emergencies.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.