How Federal Reserve’s swap lines ease global dollar shortage during Covid pandemic?

Research Title: The Fed’s International Dollar Liquidity Facilities: New Evidence on effects (NBER Working Paper)

Researchers: Linda Goldberg, Fabiola Ravazzolo


The authors aim to analyze and provide descriptive evidence of the effect of the Fed’s USD liquidity policies, including central bank swap lines and FIMA repo.

The analysis focuses on three periods — pre-pandemic (Dec 2019-March 2020), initial pandemic and when the central bank swap lines started operation (March-April), and after FIMA repo starts (late May-June) — as well as three groups of countries: those were given standing swap line by the Fed; those who were given a temporary swap line by the Fed; as well as those who can get dollar supply from the FIMA repo. The research shows that those dollar liquidity facilities had helped the countries with access to normalize faster and by a greater extent.

The researchers measured the FX swap basis spread of these countries’ currencies, which spiked during the initial pandemic stress phase. Those countries with swap line arrangement, be it the standing ones or temporary, saw smaller increases in spread (on average about 35 bps) during the initial stress period.

Interestingly, after the activation of FIMA repo lines, the participating countries experienced a larger easing of dollar funding strain (below pre-pandemic by 3.39bps), even though the repo lines hadn’t been used much in the initial months.

Access to swap line was also able to partially shield the countries from the rise in risk sentiment. As VIX hiked in the stressful period, the swap basis shot up but those with swap lines seems to have a slightly lower sensitive to the stress.

Dollar liquidity provision should help financial institutions to maintain credit supply, as the authors’ previous research suggests that during the funding strain period, the US branches of foreign banking organizations (FBOs) began to get dollar funding from their parents, and those FBOs that are in countries with access to the facilities seem to borrow more from the parents.

In this study, they further found that banking systems with access to swap lines not only continued to provide credit to banks and non-banks borrowers in other countries during the early stage of the pandemic, it’s also on average 5-6% above pre-pandemic level. Meanwhile, those with only FIMA access had lower increase in stressed period, and recorded decrease in cross border lending to banks after the access to FIMA repo started.

Also, countries with access to the dollar facilities drew in more capital inflow from both bank and non-banks, compared to those only have access to FIMA repo. However, after the FIMA repo started, the gap between the two mostly closed. These evidence seems to suggest that the Fed facilities can potentially support cross-border lending.

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