International Monetary Fed

10 May 2010 By Rolfe Winkler

In reopening swap lines to other central banks, the Fed has made another openended commitment to grease the wheels of banking, particularly in Europe. Containing debt contagion is worthy, but such interventions have downsides including potential inflation and moral hazard.

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The U.S. Federal Reserve has opened swap lines with the European Central Bank, the Bank of England, the Swiss National Bank, and the Bank of Canada. Under the agreements, the Fed creates dollars and exchanges them for foreign currency at a fixed rate. The agreements are unwound at a later date at the same exchange rate.

The foreign central bank can then lend dollars to domestic banks for accepted collateral, such as sovereign debt. The swaps have been authorized through January 2011.

The Central Bank of Canada can draw up to $30 billion. The sizes of the other commitments have not been disclosed.

The Fed opened similar swap lines in the 20072008 financial crisis after overseas investors and banks found it difficult to raise dollars. Almost $600 billion was drawn down at the peak. These lines were closed earlier this year.

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