More on those USD swap lines… | FT Alphaville

More on those USD swap lines…

Here’s a timely working paper from the BIS.

It’s a 91-page review of liquidity provisions during the financial crisis, including the multitude of currency swap lines initiated by the globe’s central banks. It’s timely because last month the Federal Reserve restarted its swap lines to help ease strains in short-term US dollar funding markets in Europe.

In late 2008, right before the collapse of Lehman Brothers, the Fed also upped its dollar lending to other central banks to help boost liquidity. So far, the Fed’s latest facility has extended a little over $10bn. In 2008, it provided a whopping $554bn in USD funding. And here’s where things get interesting.

From the paper:

Much of the sudden demand for dollar funding in international markets immediately after Lehmans’ failure appears to have resulted from the drawing of dollar funds by commercial banks in the USA from their related foreign offices. Graph 11.1 [below] shows a close correspondence in the weekly data between US commercial banks’ net debt to related foreign offices and the total amount outstanding on Fed swaps to foreign central banks. The main counterpart to the increase in US commercial banks’ net debt to related foreign offices was a massive increase in cash assets. In fact, most of the drawing-in of funds was done by foreign-related institutions in the USA, rather than domestically-chartered banks. Foreign-related institutions’ ratio of cash assets to total assets increased from 4.2% on 3rd September 2008 to 19.1% on 31st December. This was a much bigger increase than for domestically-chartered banks, or for foreign banks in other jurisdictions such as Switzerland. The reasons why it took place are beyond the scope of this paper.

Conversely, foreign subsidiaries of US banks — not just foreign banks — might have been some of the biggest beneficiaries of the Fed’s 2008 dollar-drop (if they were eligible for the funds). Unfortunately, the paper doesn’t go into much detail on the subject, but it does promise to look into the matter further.

From the footnotes:

Possible reasons for this drawing-in of funds include that commercial banks in the United States (both domestically-chartered banks and foreign-related institutions) had to finance big increases in assets, as contingent commitments to provide funds crystallized (to be discussed in a future paper), and the fact that US money market funds withdrew dollar funding from non-US banks (see Baba et al. (2009)).

Anyway, it’s an interesting tidbit to throw into dinner party conversation should anyone criticise the Fed’s swap lines on the basis that they (unduly) benefit “foreigners.”

(And yes, our dinner parties tend to be very boring).

Related links:
The dollar shortage problem, evaluated – FT Alphaville
The euro premium episode – FT Alphaville