Central Banks Make Swaps Permanent as Crisis BackstopJeff Black
Central banks in advanced economies from the U.S. to Europe and Japan said emergency currency-swap lines established during the global financial crisis will be made permanent, providing safeguards against future turbulence.
Temporary, bilateral arrangements between the European Central Bank, the Federal Reserve, the Bank of Canada, the Bank of England, the Swiss National Bank, and the Bank of Japan will be converted into standing facilities, allowing lenders access to global currencies when needed, according to statements today from the central banks.
“It’s a very sensible maneuver,” said Julian Callow, chief international economist at Barclays Plc in London. “Since the financial crisis it’s clear that central banks are coordinating much more closely. This makes permanent something that was born as an emergency reaction to that crisis.”
Officials are strengthening the ties that were forged after credit markets first seized up in 2007 by making dollars, euros and other currencies available around the clock to anyone who needs them. The decision comes as the Fed prepares to start tapering its monetary stimulus for the U.S. economy, which threatens to drive global market rates higher.
“The existing temporary swap arrangements have helped to ease strains in financial markets and mitigate their effects on economic conditions,” the Frankfurt-based ECB said. “The standing arrangements will continue to serve as a prudent liquidity backstop.”
Dollar-denominated swap arrangements between the Fed and each of the ECB, BOE, BOJ and SNB were first introduced in December 2007. They were followed by the network of agreements among the five central banks in late 2011, as a deepening of Europe’s debt crisis threatened the functioning of world financial markets. The swaps were scheduled to expire on Feb. 1.
The standing facilities established today effectively convert these arrangements into a set of swap lines between each of the central banks, an ECB spokesman said.
Other than euros, the ECB has only ever lent Swiss francs and dollars to banks in the currency bloc. As much as 25 billion francs ($27.7 billion) were drawn down by banks in multiple 7-day tenders, and dollar tenders reached a peak of $171 billion in October 2008, data provided by the ECB show.
“There’s no such thing as too much when it comes to safety nets for global markets,” said Daisuke Karakama, a Tokyo-based market economist at Mizuho Bank Ltd. who has worked at the Directorate General for Economic and Financial Affairs at the European Commission. “It’s not necessary at the moment but things happen suddenly always. It’s possible” other central banks may convert temporary swap agreements to permanent ones, he said.
The ECB said today that it will also continue to conduct regular operations in U.S. dollars, providing funds to banks with 7-day and 3-month maturities until further notice.
BOE Governor Mark Carney signaled this month that the network of global arrangements could be expanded to include the yuan as the Chinese currency gathers heft. The BOE agreed in June on a swap line with the People’s Bank of China worth 200 billion yuan ($33 billion) or 20 billion pounds ($32 billion). The ECB this month established a similar facility for 350 billion yuan or 45 billion euros ($61 billion).
Global money-market rates surged in June when Fed Chairman Ben S. Bernanke said the central bank may start reducing its $85 billion-a-month of asset purchases this year. The Fed decided yesterday to continue with the stimulus, saying it needs to see more evidence that the economy will continue to improve.
“We don’t have any concern about liquidity in global financial markets now,” Bank of Japan Governor Haruhiko Kuroda told reporters in Tokyo today. “We made it permanent because this swap line among six central banks has contributed to stabilizing global markets. The expiration will come in February next year, so we shouldn’t cause uncertainty in markets about whether this will be extended or not. We don’t have any plan to expand to more than six nations at this point.”
Bernanke said in 2010 that while the swap lines were “very important,” he preferred to keep them temporary. South Korea, as the head of the Group of 20 nations at that time, was trying to build support for the idea as part of its push for a permanent global financial-security architecture.
“We don’t necessarily want to be providing a permanent service for financial markets,” Bernanke said. “There’s a good case that we should put pressure, or at least try to influence, banks to better manage these currency mismatches, or if not currency mismatches the fact that they are relying on dollar funding and there are difficulties in achieving the funding that they need.”
Bank of Korea Governor Kim Choong Soo told reporters in Seoul today that “the permanent credit lines will of course help global financial stability.” He declined to say if South Korea, Asia’s fourth-largest economy, wants a similar deal.