III. The international spillovers of the monetary policy
14. FX SWAP-lines among the key central banks
Commercial banks can borrow and lend in different currencies.
o in the absence of capital flow restrictions and notwithstanding prudential restrictions o borrow in a foreign currency to finance assets that are denominated in the same
currency
o finance assets in their domestic currency or some other currency o obtain their foreign currency:
deposits they collect in this currency (maturity is shorter than the domestic)
unsecured (certificate of deposits or commercial paper)
secured form such as repurchase agreements
spot and swap markets
can sell assets denominated in foreign currency
o commercial banks’ balance sheets are potentially subject to mismatches between the currencies in which their assets and liabilities are labeled
mitigated by currency swaps and options that themselves generate a counterparty risk
o domestic central banks cannot create liquidity in foreign currency,
the liquidity support they can provide in the absence of currency swaps is
limited to the supply of domestic liquidities that commercial banks can swap on the Foreign Exchange (FX) market
o to act as a lender of last resorts in other currencies than their own may encourage the risk-taking behaviors of the banks operating in international currencies and hence financial instability
An agreement to exchange future cash flows according to a prearranged formula.
o Foreign exchange swap: Simultaneous spot and forward transactions exchanging one currency against another.
two reciprocal loans denominated in two currencies
o Swap point: The difference between the exchange rate of the forward transaction and the exchange rate of the spot transaction in a foreign exchange swap.
o Forward transactions in securities: purchase or sale of an interest rate instrument (usually a bond or note) is agreed on the contract date, for delivery at a future date, at a given price.
National central banks buy or sell euro spot against a foreign currency and at the same time sell or buy them back in a forward transaction.
o to increase the foreign exchange reserves they hold
o to lend against adequate collaterals to the commercial banks within their jurisdiction, to provide them with temporary liquidity in a foreign currency
o decentralized and contingent process of direct negotiation between a limited number of parties
an alternate way to acquiring FX liquidity, other than borrowing from the IMF
currency swaps between central banks were occasionally used on an ad hoc basis since the 1920s.
o for a limited duration of 3 months,
to reduce foreign exchange risk and
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limit the time during which reserves were immobilized;
o at the end of its duration,
a swap line could be cancelled or
put on standby for later reactivation
1962, the Federal Reserve:
o network of swap lines involving Western central banks as well as the Bank of International Settlements
o to aid in the provision of international liquidity in the longer term
“new generation” of central bank swaps after 2001
o September 11, 2001 episode that led to severe liquidity shortages in cross currency markets
o Federal Reserve Board (FED) and the European Central Bank (ECB)
Shortcomings of FX swap lines
o CBs can act swiftly and creatively and can leverage their money-creating power to manage massive and prompt interventions in money markets
power of central banks to create money combined with their legal capacity to sign international agreements
o CB swap-lines are more fragile and reversible than their institutional counterparts (IMF)
reconsidered when their time limit is reached
parties are usually freer and more prone to behave in an opportunistic manner
give international currencies issuers the possibility to pick and choose among potential counterparties for reasons that are not necessarily financial but might be strategic or political
not include surveillance, and conditionality is limited to use of the proceeds of the swaps – moral hazard
two-tier counterparty risks
commercial banks cannot repay their leg
central bank cannot settle the swap when due b) USD swap with FED
“central bank liquidity swap”
o prevented the collapse of systemically important financial institutions following a run of Eurodollar creditors
FED: facto international lender of last resort through central banks currency swaps
The Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank and later the Bank of Japan reciprocal swap agreement (swap line) with the Federal Reserve
o at the first time on December 3 2007 and renewed it until October 31 2013 when it was converted to a permanent standing facility
Later it was enhanced to provide euro, Japanese yen, sterling, Swiss franc and Canadian dollar liquidity in addition to the existing operations in US dollars at the end of November 2010.
c) EUR swap with ECB
a GBP-EUR swap line was signed between the ECB and Bank of England on December 17 2010
Polish central bank collected euro liquidity via repo agreement after November 21 2008
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Denmark, Hungary and Poland (they tried to make repo contracts as well, but Hungarian government bonds did not satisfy ECB’s collateral requirements) in October-November 2008.
d) Nordic EUR swap
Central banks of Sweden, Norway and Denmark have entered into a euro/Icelandic krona swap facility agreement with the Central Bank of Iceland (Sedlabanki Íslands) on May 16 2008.
A euro swap agreement became active between Swedish and Danish and Latvian central banks after December 16 2008 and was extended with central banks of Iceland, Estonia and Latvia on May 27 2009.
Later it was followed by a co-operation agreement on cross-border financial stability, crisis management and resolution between Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden on August 17 2010.
e) CHF swap
Swiss National Bank signed CHF swap agreements multiple times:
o with the ECB on October 15 2008,
o with Polish and Hungarian national banks on November 7 2008 and January 8 2009 until January 2010.
Polish National Bank reinitiated a CHF-PLN swap line later on June 25 2012.
f) Chinese RNB SWAP-lines
“central bank local currency swap”:
o internationalizing of its currency, the renminbi
Yüan or RNB is still undervalued – compared to 1990
Chinese government bond market is restricted even for domestic agents
o capital controls strictly limiting foreign access to the Chinese debt market, o the accumulation of official foreign exchange reserves in RMB is impossible, and o international commercial banks have no direct access to the mainland interbank
market
First steps towards Yüan – cross-CB swap lines o 23 active local currency swap agreements
o „Renminbi swap agreement and granting of a renminbi investment quota to the Swiss National Bank” 21 July 2014
it can use to invest part of its foreign exchange reserves in the Chinese bond market
swap agreement enables renminbi and Swiss francs to be purchased and repurchased between the two central banks, up to a limit of 150 billion renminbi, or CHF 21 billion
The PBC has granted the SNB an investment quota for the Chinese interbank bond market in the amount of 15 billion renminbi, or just over CHF 2 billion.
The SNB’s foreign exchange reserves can thereby be diversified even further
http://www.snb.ch/en/mmr/reference/pre_20140721/source/pre_2014072 1.en.pdf
o „ECB and the People’s Bank of China establish a bilateral currency swap agreement”
10 October 2013
Swap line will have a maximum size of 350 billion Chinese yuan and €45 billion.
Agreement will be valid for three years.
From the Eurosystem’s perspective, it will serve as a backstop liquidity facility.
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maximum size of 350 billion yuan when yuan are provided to the ECB and of
€45 billion when euro are provided to the PBC.
http://www.ecb.europa.eu/press/pr/date/2013/html/pr131010.en.html o „Russia, China Sign Currency Swap Agreement to Double $100b Trade” October 13,
2014
three-year swap deal is worth 150 billion yuan ($24.5 billion)
http://www.bloomberg.com/news/articles/2014-10-13/russia-china-sign-currency-swap-agreement-to-double-100b-trade
o Bank of England - People’s Bank of China swap line
reciprocal 3‑year, sterling/renminbi (RMB) currency swap line.
The maximum value of the swap is RMB 200bn.
may be used to promote bilateral trade between the two countries and
to support domestic financial stability should market conditions warrant.
unlikely event that a generalised shortage of offshore renminbi liquidity emerges, the Bank will have the capability to facilitate renminbi liquidity to eligible institutions in the UK
http://www.bankofengland.co.uk/publications/Pages/news/2013/082.aspx Literature:
Destais C. (2016): Central Bank Currency Swaps and the International Monetary System. Emerging Markets Finance & Trade, 52:2253–2266
15.Sovereign Wealth Funds - forms, portfolios, connections to developed