It is in the U.S. national interest to make sure that non-U.S. banks that are judged to be sound by their central bank are able to access the U.S. dollar funding they need in order to be able to continue to finance their U.S. dollar assets. If the access to dollar funding were severely impaired, this could necessitate the abrupt, forced sales of dollar assets by these  2  BIS central bankers’ speeches  banks, which could seriously disrupt U.S. markets and adversely affect U.S. businesses, consumers and jobs. One way we can help to support the availability of dollar funding is by engaging in currency swaps with other central banks. This has been used as a policy tool dating back to 1962. Recently, the Federal Open Market Committee decided to re-launch this tool, cooperating with five other central banks. Our intention is to create a credible backstop to – 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. This action is designed to support financial stability, avoid an unnecessary tightening in financial conditions and support economic activity and jobs in the United States. In particular, by reducing the cost of dollar funding via the swap lines last month, we reduced the pressure on banks in Europe to abruptly liquidate their U.S. dollar assets.
Although the U.S. economy is currently expanding at a moderate pace, we face significant downside risks, mostly relating to the sovereign debt crisis in Europe. Because developments in Europe will have an important bearing on the prospects for growth and jobs here in the U.S., the Federal Reserve is monitoring the situation there closely. This is also why we have taken special steps, in cooperation with other central banks, to support the flow of credit to households and businesses. I welcome the opportunity to testify on these matters today. II. Europe  Within the European Union, seventeen countries share a common currency, the euro. The situation in the euro area is very unsettled, with pressure on sovereign debt markets and local banking systems. The euro area has the capacity, including the fiscal capacity, to overcome its challenges. However, the politics are very difficult, both because the problem has many dimensions, and because many different countries and institutions in the euro area have to coordinate their actions in order to achieve a coherent and effective policy response. Europe’s leadership has affirmed its commitment to the European Union and its single currency monetary union on numerous occasions. And the leadership is working to achieve greater policy coordination in areas such as fiscal policy. Putting all the countries using the euro on a clearly sustainable fiscal path would help restore market confidence. Assuming that Europe ultimately succeeds in managing this situation, a stronger union will emerge that will be viewed as more robust and resilient.