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1 1 (April 7, 2020)

handle is hein.crs/govcqzr0001 and id is 1 raw text is: 01;0i E~$~ & April 7, 2020 COVID-19: Federal Reserve Support for Foreign Central Banks As part of the U.S. response to COVID-19, the U.S. Federal Reserve (Fed) has taken steps to ensure that foreign central banks have uninterrupted access to U.S. dollars. First, the Fed established emergency swap lines, or temporary reciprocal currency arrangements, with a broader group of central banks and lowered the interest rate it charges on the swap lines. Swap lines allow foreign central banks to temporarily exchange their currency for dollars with the Fed. When the swap is concluded, the foreign central bank returns the dollars, with interest, to the Fed and the Fed returns the foreign currency. Second, the Fed created a foreign central bank (FIMA) repo facility. The facility, which also charges interest, allows foreign central banks to temporarily exchange their U.S. Treasury securities for U.S. dollars. In the U.S. banking system, the Fed serves as the lender of last resort to domestic banks in a financial crisis. In periods of economic turmoil, such as now, during the financial crisis of 2007-2009, and after the September 11, 2001 terrorist attacks, the Fed has provided emergency liquidity to banks to keep them from failing. According to a recent survey by the Bank for International Settlements (BIS), the dollar accounts for 88% of global foreign exchange market turnover and is key in funding an array of financial transactions, including serving as an invoicing currency to facilitate international trade. The dollar also accounts for two-thirds of central bank foreign exchange holdings, half of non-U.S. banks foreign currency deposits, and two-thirds of non-U.S. corporate borrowings from banks and the corporate bond market. As a result, disruptions to international dollar lending markets can have wide-ranging repercussions on international trade and financial transactions. The BIS also estimates that banks outside the United States have over $13 trillion in dollar denominated assets. In a global economic crisis, banks all over the world are reliant on the Fed to make sufficient liquidity available to prevent their collapse. In the current crisis, a massive economic shutdown due to plant closures and national lockdowns has interrupted global supply chains, which are largely funded privately with dollar-denominated credit. As supply chains break down, businesses with insufficient dollars will seek to quickly draw down pre-existing loan facilities and hoard dollars. In addition to disrupted supply chains, recent volatility in the stock and bond markets spurred a rush to dollar-denominated assets as a safe haven during the crisis. As a result of this surge for dollars, the value of the dollar has soared (see Figure 1). The availability of dollar access has since eased pressure in some countries. Figure I. Trade-Weighted U.S. Dollar Index k39 :f:cl -:: Source: Federal Reserve Swap lines and the FIMA repo facility are intended to provide liquidity to private banks in non-domestic denominations. Because banks lend long-term and borrow short-term, a solvent bank can become illiquid in a panic, meaning it cannot borrow in private markets to meet short- term cash flow needs. For example, many European banks have borrowed in dollars to finance dollar-denominated transactions. Typically, banks can only borrow from their home central bank, and central banks can only provide liquidity in their own currency. (The U.S. affiliate of a foreign bank can borrow from the Fed, but not the parent.) The Fed's swap lines and repo facility allow foreign central banks to provide needed liquidity to their country's banks in dollars. The Fed's first swap lines, which were created in the 1960s, played a prominent role during the 2007-2009 financial crisis. Overall, ten central banks drew on the swap lines at some point during the crisis, and four more were eligible to but did not-use the swap lines. In October 2008, the Fed made the swap lines with certain countries unlimited in size. These swap lines expired in February 2010, but were subsequently reopened in May 2010 with the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank in response to the eurozone crisis. Although initially temporary, the Fed converted them to permanent standing arrangements in October 2013. On March 19, 2020, the Fed announced a major expansion of the swap lines to nine additional central banks, all of whom also had access to Fed liquidity following the 2007-2009 crisis. These new facilities will support the provision of U.S. dollar liquidity in amounts up to $60 billion each to the central banks of Australia, Brazil, Mexico, Singapore, South Korea and Sweden, and up to $30 billion each for Denmark, Norway, p\w -- , gn'a', goo mppm qq\ a , q 'S I 11LULANUALiN,

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