Swap Lines As Anti Crisis Measure

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Swap lines as anti-crisis measure

After the world financial crisis of 2008, there have been significant changes in the operation of the central banks of a large number of countries. The monetary policies were forced to be modified by implementation of a series of measures, which were not previously exploited and considered “nonstandard”. On the worldwide basis, this was mostly the development of the reciprocal currency arrangements, which assume the creation of the swap lines, designed for solving the liquidity problems on the world financial markets.

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Forming of swap lines between two central banks means that in case the need emerges, the banks are obliged to effect the exchange of the …show more content…

During the 2008 crisis the money, received by the central banks in terms of the swap deals, was redistributed on an auction basis to the commercial banks in order to make the currency (US dollar mainly) situation on the world markets more stable. The wide spread of the swap lines and the increase of their scope represents a new trend in the practice of the central banks and is worth a thorough research. Certain authors, for instance Moreno (2010), Destais (2013), Aizenman, Jinjarak and Park (2011) claim that such currency agreements may decrease the necessity of the foreign-exchange reserves allocation and become an alternative to such credit instruments of the international market as the IMF credit lines.
Due to the great effect the swap operations have on the economic conjuncture in dollar liquidity, they are historically supervised by the Federal Reserve. When a central bank activates a swap line in order to increase its dollar liquidity, it makes a direct exchange of a certain amount of the national currency on the dollars, out of the framework of the world currency exchange market, according to the exchange rate on the moment of the transaction. The simultaneous creation of the agreement to buy back the same amount of currency at the same exchange rate is normally concluded for a period from one day to three months.
Since both transactions within the swap

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