Swap Lines As Anti Crisis Measure

After the Great Depression of 1930 the global financial crisis of 2008 is the biggest global crisis in the world. As the 1930 Great Depression the crisis of 2008 also began in United States of America and spread all over the world. Since the last decade of 20th century most of developed market economies changed their economical policy and passed to the central banks policy. By this policy banks gained the control on monetary actions of states. The main goal of these banks was the stabilization of price (Chwieroth 2011,2-3).After ratification of central banks policy there was a great progress and stability in economies of most countries.

The internet has allowed the money market to operate 24 hours a day. It has been noted however that exchange rate volatility has increased,[v] which makes it more difficult for the government to set monetary policy.

Central banks intervene in foreign exchange markets by “influencing the monetary funds transfer rate of a nation’s currency” with the purpose of building reserves, keeping the exchange rate stable, to correct imbalances, to avoid volatility and keep credibility. It implies changing the value of a currency against another one. It creates demand or supply of a currency by buying or selling the country’s currency in the foreign exchange market. (Foreign Exchange Intervention)

Although all of the ten amendments in the Bill of Rights are important, two of the amendments that made a huge impact in United States history are the first and second amendments. These amendments not only shaped many events from 1790 - 1820, but continue to influence recent history, as well. The Bill of Rights was ratified December 15, 1791, with the first amendment giving us the freedom of speech, religion, and press, and the second amendment giving us the right to bear arms.

The financial crisis of 2008 has been described as the worst financial crisis the world has seen since the great depression, but there are now murmurings of the potential for an even greater financial crisis, a currency crisis, caused by the demise of the US Dollar. The Dollar has been the reserve currency of the world since it took over from the Pound at the end of world war two, but we examine if it is about to crash spectacularly?

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of

Banks need to maintain a regulatory capital according to Basel Accord. In swaps, there is no exchange of notional, only the net interest rate differences are exchanged against

In 2008, the world experienced a tremendous financial crisis which is rooted from the U.S housing market. Moreover, it is considered by many economists as one of the worst recessions since the Great Depression in 1930s. After bringing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It ruined economies, crumble financial corporations and impoverished individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG. These collapses not only influenced own countries but also international scale. Hence, the intervention of governments by changing and expanding the monetary

(Wright and Quadrini, 2009, p. 221) In order to influence the Foreign exchange rate a country will perform an unsterilized foreign exchange intervention, subsequently, these transactions will influence the FX rate exchange because they influence the monetary base. The reasons for interventions vary, but one is to stabilize the FX exchange rate. An example of a unsterilized transaction would be if a Central Bank bought $50 million Foreign international reserves. It would increase foreign international reserves and the monetary base. In contrast, there is a sterilized transaction in which the Central Bank which should not have a long term impact on the Foreign exchange rate. To offset the purchase of the $50 million Foreign reserves it might sell $50 million domestic bonds. (Wright & Quadrini, 2009, p.

A country taking part during this system required official reserves government or financial organization holdings of gold and widely accepted foreign currencies that could be used to purchase the domestic currency in exchange markets, as required to take care of its rate of exchange. However the international supply of 2 key assets i.e. gold and

Open market operations play an important role in steering interest rates, managing the liquidity situation in the market and signaling the monetary policy stance. Open market operations are initiated by the ECB, which decides on the instrument and the terms and conditions. It is possible to execute open market operations on the basis of standard tenders, quick tenders or bilateral procedures. Open market operations can differ in terms of aim,

The countries central bank maintains a fixed parity through direct intervention in the foreign exchange markets, for this reason the central bank must hold large reserves of foreign currency so as to mitigate the changes in supply and demand of their currency. If demand for a currency were to increase the exchange the central bank would have to sell enough of that currency in exchange for their own, to meet demand and maintain the exchange rate. A countries central bank is also able to maintain their exchange rate peg indirectly through the use of interest rate policy, imposition of foreign exchange regulations or intervention by other public institutions.

There are many factors involved and questions that can arise when it comes studying central banking and Foreign Exchange Markets. This paper will attempt to explain why the simultaneous targeting of the money supply and interest rate is at times impossible to achieve, ways in which Central Banks can intervene in Foreign Exchange Markets, and what the Britton Woods Agreement did to the ability of foreign exchange rates to fluctuate freely.

In general, an independent, transparent and credible central bank, “strong fiscal position”, sound financial system with rigorous regulation and supervision and flexible exchange rate is vital. Furthermore, a more effective strategy is supposed to “phase in” following successful disinflation (Mishkin, 2000, p.106-p.107).

The earliest SWAP market originated in the United Kingdom in the 1970s. The main purpose of this market is to circumvent the foreign exchange controls adopted by the British government. The first swap is a change in the currency swap. The British government taxes foreign exchange transactions involving sterling. This makes it more difficult for capital to leave the country, thereby increasing domestic investment.