With Fed foreign currency swaps on the rise, mystery remains which foreign banks benefit


Since the end of August, the European Central Bank has been drawing on the foreign currency swap line established by the U.S. Federal Reserve Board, recently securing $1.8 billion to lend to European banks, most of it over a three-month time period. But the ECB does not name which banks or institutions are receiving these dollars. Who gets the money is anybody's guess.

In the response of worsening economic conditions in Europe, in late June the Fed announced that it was extending authority for such swap arrangements with the European Central Bank (ECB) and three other foreign banks. This swap line is similar to that set up during the 2008 financial crisis, which the Fed had renewed in May 2010.

A $1.35 billion draw on the currency line on October 13 over an 84-day term is the longest term swap of these recent arrangements, as the rest of the recent deals have been written for seven days. Longer term swaps are considered more serious, as they show that the foreign central banks want more time before returning the dollars.

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.

While both the Fed and the ECB release up-to-date summary data on their websites about these exchanges, no details are provided on which specific banks benefit. When former Rep. Alan Grayson, D-Fla., asked Federal Reserve Chairman Bernard Bernanke in July 2009 point blank about who received the loans enabled by foreign currency swaps, the chairman replied, “I don’t know." Bernanke maintained that there is no need for such information to be public because the swap arrangement is made with foreign central banks, not individual European banks.

But critics say more transparency is needed. "How do we protect against conflicts of interest…and how do we evaluate the effectiveness of these efforts, without knowing where the money went?" says Mark Calabria, director of director of financial regulation studies at the libertarian Cato Institute.

The banking industry has long opposed disclosure about the loans they receive from central banks, arguing that it could harm individual banks' competitiveness and reduce the effectiveness of central bank policy. Recently the Clearinghouse, which represents the nation's largest banks, made this argument–but failed–in an attempt to stop a court-ordered release of "discount window" lending by the Fed during the financial crisis. (See also this story on the Fed's secrecy about its emergency loans.)

The recently approved Dodd-Frank financial reform law mandates that certain loan data–including foreign currency swaps–be made available to the public. But there is no requirement that the loans made by foreign central banks in conjunction with the swap line be made public, nor does the ECB have a policy of making such information public.

While the foreign central banks are dipping into the currency swap line now in the face of deterioriating economic conditions, so far the levels of swaps are nowhere near what they were during the financial crisis. When the world’s economy spun out of control in the fall of 2008, one of the main symptoms was the freezing of private foreign exchange markets, the means by which foreign economies usually obtain the dollars they need.

Into the gap stepped the Fed, which opened up credit swap lines to bring liquidity back to the private markets. At the height of the crisis, the Fed’s outstanding dollar swaps rose to $586 billion by the end of 2008, according to an audit of Federal Reserve emergency programs recently released by the U.S. General Accountability Office.

Eighty percent of the aggregate dollars swapped by the Fed went to the ECB. Nine other central banks also participated in the program, including the Bank of England, the Swiss National Bank, and the Bank of Japan, said the GAO. And while we don't know who benefitted from these dollars, other emergency loan programs established by the Fed helped foreign banks such as Deutsche Bank, Credit Suisse, and Barclays.

The data on the Fed's currency swaps during the crisis prove that "only massive, emergency, and unlimited Fed intervention in the foreign exhange markets prevented a collapse," wrote Better Markets in a February 2011 letter to U.S. Treasury Department Secretary Timothy Geithner. Better Markets was arguing that Geithner should not exempt private foreign exchange swaps from regulation under the Dodd-Frank law. In April 2011, Geithner proposed such an exemption. Earlier, he had met with executives from foreign banks to discuss the issue, according to agency meeting logs. Better Markets representatives and consumer groups also had meetings with Treasury officials, on this issue, but not with Geithner.


Federal Reserve Central Bank Liquidity Swaps

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Sources: U.S. Federal Reserve Board, European Central Bank

*Value pulled from European Central Bank data, which is reported in advance of the Federal Reserve Board's data. All other data come from Federal Reserve balance sheet.  

About the data

What: While the Fed reports totals on currency swaps with foreign central banks, it does not make public which banks or institutions receive loans from those foreign central banks

Where: Foreign central banks

Availability: The Fed maintains that it does not collect information on what foreign central banks do with dollars they obtain through currency swaps with the Fed.

Usability: n/a