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European Central Bank borrowing from Federal Reserve on the rise

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The European Central Bank (ECB) today announced more than $2 billion in borrowing from the Federal Reserve's currency swap line, the highest amount since the U.S. central bank reopened this facility in May 2010.

The increased borrowing comes amidst reports that the private foreign currency market is chilling, with the cost of European banks obtaining dollars on the rise. While the conditions are not nearly as bad as they became during the 2008 financial crisis, when foreign exchange markets froze and Fed currency swaps with foreign central banks rose to $586 billion, the increasing amounts are another indicator of Europe's mounting troubles.

Under such swap agreements, a foreign bank draws on dollars at the Fed in exchange for its own currency. The foreign bank agrees to buy back its currency at a certain date at the same exchange rate, plus interest. This gives the foreign banks, which have become dollar-starved as American investors pull out their money in European ventures, U.S. currency to lend out to banks and institutions. Because the swaps are collateralized with foreign currency and the exchange rate is set, the risk to the Fed is considered low.

One of the new loans announced today is for $395 million over an 84-day term, joining an earlier 84-day loan of $1.353 billion. Another loan for $500 million matures over a seven-day period.

The ECB does not make public which banks receive the dollars it obtains from the Fed, a sore point for critics who have called for more transparency. Its reports of swaps with the Fed are reported weekly here, before the Fed reports them here.