A central bank liquidity swap is a reciprocal currency arrangement that lets one central bank obtain another's currency and lend it to banks in its own jurisdiction. Six central banks have kept standing U.S. dollar swap lines open since October 31, 2013, per the Federal Reserve Bank of New York, which conducts the arrangements for the Federal Reserve.
The six are the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada and the Swiss National Bank, per the Federal Reserve's description of its central bank liquidity swap lines.
What actually happens when a swap line is drawn?
Two transactions are agreed at the same moment, not one loan. The Federal Reserve sets out the sequence as follows.
- The foreign central bank sells a specified amount of its own currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate, per the Federal Reserve.
- Simultaneously, the two parties agree a second transaction that obligates the foreign central bank to buy back its currency on a specified future date, "which could be the next day or as much as three months later," per the Federal Reserve.
- The foreign central bank lends the dollars on to depository institutions in its own jurisdiction, on its own terms.
- At the conclusion of the second leg, the foreign central bank pays interest to the Federal Reserve on the dollars drawn, per the Federal Reserve.
Both legs are conducted at the same exchange rate. Because of that, "the recorded value of the foreign currency amount is not affected by changes in the market exchange rate," per the Federal Reserve, and the Federal Reserve bears no exchange rate risk on the transaction.
Who carries the credit risk?
The foreign central bank does, on the loans it makes. "In the swap transactions, the Federal Reserve deals only with the foreign central bank," per the Federal Reserve, which states that it "is not a counterparty to the loan extended by the foreign central bank to depository institutions." The foreign central bank is obligated to return the dollars under the terms of the agreement regardless of what happens to the banks it funded.
The analysis: the risk allocation, not the size of the lines, is the load-bearing design feature. A drawing central bank absorbs the commercial credit exposure and the exchange rate is fixed across both legs, which leaves the Federal Reserve with an obligation owed by a sovereign monetary authority rather than by private banks abroad. What would change this reading is a case in the official record of a counterparty central bank failing to return dollars at the second leg; the Federal Reserve and New York Fed materials cited here describe no such case.
What do the operations cost, and how often do they run?
Dollar operations under the standing lines are priced at the U.S. dollar overnight index swap (OIS) rate plus 25 basis points. The six central banks agreed to lower the pricing on the standing dollar swap arrangements by 25 basis points, taking effect with the operations scheduled during the week of March 16, 2020, per the ECB's coordinated announcement of March 15, 2020, which also added 84-day maturity operations alongside the existing one-week tenor.
Frequency has moved with funding conditions rather than staying fixed. On March 19, 2023 the same six central banks announced that the frequency of 7-day maturity operations would increase "from weekly to daily," with those daily operations commencing on Monday, March 20, 2023, and continuing "at least through the end of April," per the Federal Reserve.
Between drawings the plumbing is kept warm. The New York Fed undertakes small value transactions from time to time to test operational readiness, publishing the results on a weekly basis when they are conducted, per the New York Fed.
Do the lines only move dollars?
No. The standing arrangements run in both directions. Dollar swaps give partner central banks capacity to deliver U.S. dollar funding to institutions in their jurisdictions, while foreign-currency swaps allow the Federal Reserve to offer liquidity to U.S. institutions in Canadian dollars, sterling, yen, euro and Swiss francs, per the New York Fed.
The ECB runs its own euro network on the same principle. "Swap lines between two central banks are currency swap arrangements to exchange currencies at a predetermined rate, with a commitment to reverse the transaction at a specified future date," per the ECB, which lists standing reciprocal lines with the Federal Reserve, Bank of Japan, Bank of England, Bank of Canada and Swiss National Bank alongside capped lines with smaller counterparties.
| Arrangement | Counterparty | Stated ceiling | Status |
|---|---|---|---|
| ECB standing reciprocal lines | Federal Reserve, Bank of Japan, Bank of England, Bank of Canada, Swiss National Bank | No stated maximum | Standing, no expiry date |
| ECB non-reciprocal line | Danmarks Nationalbank | EUR 24 billion | Standing |
| ECB non-reciprocal line | Sveriges Riksbank | EUR 10 billion | Standing |
| ECB reciprocal line | People's Bank of China | EUR 45 billion (CNY 350 billion in the reverse direction) | Expires October 8, 2028 |
| North American Framework Agreement, 1994 | Bank of Canada | USD 2 billion | Standing |
| North American Framework Agreement, 1994 | Bank of Mexico | USD 3 billion | Standing |
Ceilings and expiry dates per the ECB and the New York Fed. The New York Fed also acts as fiscal agent for a separate USD 9 billion line between the U.S. Treasury and Mexico, established under the same 1994 framework.
How large has usage actually gotten?
Large enough to dwarf the standing ceilings. Federal Reserve swap lines outstanding reached more than USD 580 billion by December 10, 2008, per the Yale School of Management, which records that caps on the major lines were removed entirely in October 2008 after having stood at USD 60 billion for the Swiss National Bank and USD 240 billion for the ECB.
The 2020 episode widened the perimeter rather than the price. On March 19, 2020 the Federal Reserve established arrangements with nine additional central banks, taking the total to 14 counterparties, with maximum amounts of USD 60 billion for six of them and USD 30 billion for three, per the Yale School of Management.
The analysis: the record shows the network expanding along two separate axes — depth for the five standing partners, whose caps were lifted, and breadth for temporary counterparties, whose access came with numerical limits. Which axis moves in a future episode is not something the sourced record settles, and the temporary 2020 arrangements are not part of the standing six-bank framework described by the Federal Reserve and the New York Fed.
What is available to central banks without a swap line?
A collateralised alternative. On July 28, 2021 the Federal Reserve established a standing repurchase agreement facility for foreign and international monetary authorities, known as the FIMA repo facility, with the rate set initially at 25 basis points and a per-counterparty limit of USD 60 billion, per the Federal Reserve.
The distinction matters mechanically. A swap is uncollateralised in the conventional sense and settled against the counterparty's own currency; the FIMA facility instead lets foreign official institutions raise dollars overnight against Treasury securities already held in custody at the Federal Reserve Bank of New York, per the Federal Reserve.
Frequently asked questions
Are the standing dollar swap lines capped?
The Federal Reserve and the New York Fed describe the arrangements with the Bank of Canada, Bank of England, Bank of Japan, ECB and Swiss National Bank as standing, in place since October 31, 2013, and the ECB lists its reciprocal lines with those counterparties without a stated maximum. Separate capped lines exist under other frameworks.
What rate does a drawing central bank pay?
Dollar operations are priced at the U.S. dollar overnight index swap rate plus 25 basis points, following the coordinated 25 basis point reduction announced on March 15, 2020 and effective with operations in the week of March 16, 2020, per the ECB. The drawing central bank pays that interest at the second leg, per the Federal Reserve.
Does the Federal Reserve take exchange rate risk?
No. Both legs of the transaction are conducted at the same exchange rate, so the recorded value of the foreign currency is unaffected by market moves and the Federal Reserve bears no exchange rate risk, per the Federal Reserve. Its counterparty is the foreign central bank alone.
How long can a drawing run?
The second leg can settle as soon as the next day or as much as three months later, per the Federal Reserve. Operations offered under the coordinated framework have included one-week and 84-day maturities, per the ECB's March 15, 2020 announcement.
Who can use the FIMA repo facility?
Foreign and international monetary authorities holding Treasury securities in custody at the Federal Reserve Bank of New York. The standing facility was established on July 28, 2021, with the rate set initially at 25 basis points and a limit of USD 60 billion per counterparty, per the Federal Reserve.
For a related economy news perspective, read How the Fed's Dollar Swap Lines Actually Work.
For more context, read How Economic Sanctions Actually Work.