Also, the direct exposures of U.S. banks to the countries in Europe that are facing the most intense fiscal challenges are actually quite modest. The bad news is that the exposures of the U.S. banks climb quite sharply when one also considers the exposures to the core European countries and to the overall European banking system. This means that if the crisis were to broaden further and intensify, this could put greater pressure on U.S. banks’ capital and liquidity buffers. Third, if the European situation were to deteriorate further, financial markets would likely become more stressed. This could tighten the availability of credit to U.S. households and businesses. It could also cause equity prices to fall and this would have a negative impact on Americans’ pension and 401(k) holdings. This tightening of financial conditions would damage the U.S. recovery and result in slower output growth and less job creation. At a time that U.S. unemployment is very high, this is a particularly unacceptable outcome. In the extreme, U.S. financial markets could become so impaired that this would dry up the flow of credit to households and businesses. III. U.S. dollar swaps  In terms of what actions the official sector in the United States has taken or could take with regard to Europe, I wish to emphasize that any and all such actions pursued by the Federal Reserve are motivated by the mandates Congress has given to the Federal Reserve to promote price stability and maximum sustainable employment here in the United States.
When the Federal Reserve System was created by Congress in 1913, it was given the responsibility of providing liquidity to the financial system in times of stress in order to shield the economy, to the extent possible, from the severe effects of financial instability on economic activity and jobs. While the economy and the markets have evolved substantially in the century since then, this basic principle continues to guide our efforts today. Central banks around the world have an important lender of last resort role. This role is important in order to protect the economy against financial instability. In today’s globally integrated economy, banks headquartered outside of the U.S. play an important role in providing credit and other financial services in the U.S. – providing a total of about $ billion in overall financing within the U.S. For these banks to provide U.S. dollar loans, they have to maintain access to U.S. dollar funding. At a time when it is already hard enough for American families and firms to get the credit they need, we have a strong interest in making sure that these banks can continue to be active in the U.S. dollar markets. Banks headquartered outside the U.S., like banks that are headquartered here, make extensive use of dollars in their financing activities. In part, this is due to the fact that the U.S. dollar is the world’s number one currency – a status that brings with it many benefits for our country.