6 key central banks in the world to make currency swap arrangements permanent

November 4, 2013

6 major central banks of the world to make their network of currency swap facility permanent. These banks will convert their temporary bilateral liquidity swap facility into standing facility that will remain permanent until further notice. The 6 central banks are:-

The Bank of Japan
US Federal Reserve
The European Central Bank
The Bank of England
The Central Bank of Canada
The Central Bank of Switzerland

What are the reasons behind making currency swap arrangements permanent?

A prudent liquidity backstop
The Currency swap lines kept a check on the funding costs which had risen very high owing to concerns over counter-party risk in response to the 2007-09 financial crisis
To avoid uncertainty as these Currency swap lines arrangements were next due for review in February 2014

The move is being seen as a “prudent liquidity backstop” in case of future global financial stress. The existent temporary swap arrangements have assisted in comforting the strains in financial markets and extenuate their effects on economic conditions, thus the standing arrangements will extend to serve as a prudent liquidity backstop.
About 6 years ago, the Currency swap lines were first introduced as a reaction to a global financial crisis which famished banks of liquidity and endangered to choke the complete financial system. These currency swap lines were a crucial part of the policy response to the 2007-09 financial crisis.
These Currency swap lines kept a check on the funding costs which had risen very high owing to concerns over counter-party risk.
The arrangements were next due for review in February 2014.
The structure had assisted in bringing stableness to financial markets and the move to make it permanent doesn’t hints towards any new alarm about liquidity.
It was decided to make them permanent to annul doubtfulness, as these arrangements were due to expire next February, 2014. At present there are no plans to extend the swap arrangements beyond the 6 central banks.

What is a Currency Swap Line (or simply a Swap Line)?

A swap line is a temporary reciprocal currency arrangement amongst central banks in the world. In a swap line, the central banks mutually concur to keep a supply of their country’s currency available to trade to other central banks at the going exchange rate. Thus, it is purely intended for overnight and short-term lending.

What is objective of a foreign currency liquidity swap lines?

To furnish a central bank with the ability to offer liquidity in foreign currencies its country’s financial institutions.
The central banks can thus lend to their private banks in order that the private banks can maintain their reserve requirements. This liquidity thus is essential for smooth operation of the financial markets. These swap lines are thus a contingency measure, so that central banks can offer liquidity in foreign currencies if market conditions warrant such actions.