Most recently, the Federal Reserve established dollar swap lines with major central banks during the global financial crisis of 2008, and reactivated them in May 2010. Last November, the FOMC, cooperating with five other central banks, reduced the rate being charged on these swaps to increase usage. The swaps are intended to create a credible backstop to support – but not supplant – private markets. Banks with surplus dollars are more likely to lend to banks in need of dollars if they know that the borrowing bank will be able to obtain the dollars it needs to repay the loan, if necessary, from its central bank. Ultimately, these dollar swaps are designed to support financial stability, and avoid an unnecessary tightening in financial conditions, so that economic activity and job creation in the United States can continue to recover. Our principal aim is to protect U.S. banks, businesses and consumers from adverse economic trends abroad. I am pleased that the swaps seem to be working. In conjunction with the ECB’s long-term refinancing operations, the swaps have helped European banks avoid the significant liquidity pressures we feared a few months ago and have reduced the risk that they would need to sell off their U.S. dollar assets abruptly. Conclusion In sum, I am hopeful that Europe can effectively address its current fiscal challenges. The Federal Reserve is actively and carefully assessing this situation and the potential impact on the U.S. economy.
At this time, although I do not anticipate further efforts by the Federal Reserve to address the potential spillover effects of Europe on the United States, we will continue to monitor the situation closely. Thank you for your invitation to testify today, and I look forward to answering your questions. BIS central bankers’ speeches  3