[ed. Article from Sept. 2008 explaining swap lines, the transactions that are central to the coordinated efforts lifting markets today (along with China's easing of reserve ratios). Other than noting the date of this article and reflecting on how well this worked out last time, what is this likely to accomplish? Hard to say, it will certainly inject more dollars into the Eurozone and increase liquidity thereby (hopefully) freeing up lending, but the problem is not so much liquidity as debt, and possible insolvency. Lack of liquidity is a function of a lender's concern about the ability of a borrower to pay back their loans. So, has this changed anything? Only that risk has now been transfered from individual banks to a new set of lenders - the Fed and Central banks around the world as they throw money at the crisis and hope something sticks. At least that's my take on it. We're still very far from seeing the edge of the woods, let alone being out of it.]
This morning the Federal Open Market Committee (FOMC) authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). According to the Fed’s press release, the changes allow for “increases in the existing swap lines with the ECB and the Swiss National Bank” and for “new swap facilities…with the Bank of Japan, the Bank of England, and the Bank of Canada.”
“These measures…are designed to improve the liquidity conditions in global financial markets,” the release continued.
What did the Fed do and how will this action address some of the strain in liquidity conditions that recently have emerged?
A good place to start is by looking at what, exactly, a currency swap line is. A currency swap is a transaction where two parties exchange an agreed amount of two currencies while at the same time agreeing to unwind the currency exchange at a future date.
Consider this example. Today the Fed initiated a $40 billion swap line with the Bank of England (BOE), meaning that the BOE will receive $40 billion U.S. dollars and the Fed will receive an implied £22 billion (using yesterday’s USD/GBP exchange rate of 1.8173).
Currency Swap:
An underlying aspect of a currency swap is that banks (and businesses) around the world have assets and liabilities not only in their home currency, but also in dollars. Thus, banks in England need funding in U.S. dollars as well as in pounds.
by Mike Hammill, Federal Reserve Bank Atlanta (2008) | Continue reading:
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This morning the Federal Open Market Committee (FOMC) authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). According to the Fed’s press release, the changes allow for “increases in the existing swap lines with the ECB and the Swiss National Bank” and for “new swap facilities…with the Bank of Japan, the Bank of England, and the Bank of Canada.”
“These measures…are designed to improve the liquidity conditions in global financial markets,” the release continued.
What did the Fed do and how will this action address some of the strain in liquidity conditions that recently have emerged?
A good place to start is by looking at what, exactly, a currency swap line is. A currency swap is a transaction where two parties exchange an agreed amount of two currencies while at the same time agreeing to unwind the currency exchange at a future date.
Consider this example. Today the Fed initiated a $40 billion swap line with the Bank of England (BOE), meaning that the BOE will receive $40 billion U.S. dollars and the Fed will receive an implied £22 billion (using yesterday’s USD/GBP exchange rate of 1.8173).
Currency Swap:
An underlying aspect of a currency swap is that banks (and businesses) around the world have assets and liabilities not only in their home currency, but also in dollars. Thus, banks in England need funding in U.S. dollars as well as in pounds.
by Mike Hammill, Federal Reserve Bank Atlanta (2008) | Continue reading:
