FRANKFURT (Reuters) - Currency swap lines linking world central banks help make global banks more resilient in times of financial stress and protect American households and firms from the knock-on effects of such episodes, a top Federal Reserve official said on Monday.
Top central banks around the world last week renewed a series of currency swap lines set up during the 2007-2009 financial crisis, providing a precaution against future market strains.
“The Federal Reserve’s temporary dollar liquidity swap lines with the European Central Bank and other central banks are an effective response to stresses in dollar funding markets,” Fed Board Governor Jeremy Stein said in remarks prepared for delivery to the Global Research Forum, International Macroeconomics and Finance, at the European Central Bank.
“These lines have helped avert fire sales of dollar assets and maintain the flow of credit to U.S. households and firms.”
The Fed last week said it had extended for another year the dollar swaps with the European Central Bank, Bank of Canada, Bank of England and Swiss National Bank.
Asked during a panel discussion whether these swap lines posed a risk to the Fed, Stein said: “Nothing in life is a sure thing. These are pretty risk-less. If you think about our swap lines with the ECB they are fully collateralized.”
Stein, who did not comment on the U.S. economic outlook or monetary policy in his prepared remarks, said proposed rules from the Fed last week to tighten oversight of foreign banks should also help make them more resilient.
The proposed plan would force foreign banks to group all their subsidiaries under a holding company, subject to the same capital standards as U.S. holding companies. The biggest banks will also need to hold liquidity buffers.
“These rules should reduce the pressure on foreign banks that rely heavily on short-term dollar funding to either sell illiquid dollar assets or cut back on dollar lending in times of financial stress,” he said. “By helping to alleviate disruptions in dollar funding markets the rules should also reduce the reliance on swap lines in a future stress episode.”
Swap lines were an important part of the powerful response launched by monetary authorities during the crisis to keep global financial markets open, curbing lofty dollar funding costs which had spiraled due to fear over counter-party risk.
Swap arrangements were revised and extended in November, 2011 as the euro zone debt crisis intensified, to ease the dollar funding pressure being experienced by some European banks.
Writing by Ann Saphir; Editing by Andrea Ricci and Andrew Hay