Central banks give each other access to currency

Posted at: 10/31/2013 7:35 AM

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The decision announced Thursday extends currency swap arrangements that until now had been considered temporary measures.


The so-called swap lines enable those central banks to make sure banks in their home countries can always borrow ready cash from them in any of the currencies involved, should they need it.


The Fed and the ECB started their first dollar-euro swap arrangement in December, 2007 as the losses on mortgage-backed bonds began to shake the banking system. Subsequent bilateral deals between the different banks were added during the financial turbulence that followed, which included the collapse of U.S. investment bank Lehman Brothers in 2008, plunges on stock markets, the subsequent recession, and Europe’s crisis over too much government debt in several countries.

Central banks serve as custodians of their countries’ currencies and play an important role in supporting the stability of banks so companies can do business and the economy can function properly.

They typically provide liquidity _ ready cash to meet the demands of everyday business _ to their banks, even when banks may be having trouble borrowing elsewhere due to market trouble. With the currency arrangements, they can do it in currencies other than their own.

For example, the European Central Bank holds credit offerings in U.S. dollars for periods of seven days and three months, offering as much in dollars as European banks may want in return for collateral such as bonds or other securities.
