Central Banks Expand Currency Swaps

By JACK HEALY

April 7, 2009

Central banks in the United States, Europe, Britain and Japan announced an agreement on Monday that could provide some $287 billion in liquidity to the Federal Reserve, in the form of currency swaps.

Under the arrangement, the Fed could draw on these lines to provide more liquidity to financial institutions, this time in the form of foreign currency.

The announcement was the latest in a series of coordinated efforts between the Federal Reserve and other central banks to try to unlock credit markets, restore normal lending and raise confidence in the financial system.

“Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap agreements with the relevant central banks,” the Federal Reserve said in a statement. “Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets.”

The Bank of England agreed to provide £30 billion ($44.7 billion) in currency swaps, while the European Central Bank said it would provide 80 billion euros ($108 billion). The Swiss National Bank offered 40 billion in Swiss francs ($35 billion) while the Bank of Japan said it would provide 10 trillion yen ($100 billion).

The currency-swap agreements would be active through Oct. 30. So far, the Fed has not announced that it has drawn on any of these lines.

“This really underlines the globalization of the monetary system,” said Ashraf Laidi, chief foreign exchange strategist at CMC Markets. “You could say that the global central banks are being used as an indirect means of shoring up liquidity in a nation’s commercial banks.”

Late last year, as the credit crisis took hold and global liquidity dried up, the Federal Reserve and the European Central Bank, Bank of Japan and Bank of England set up a series of currency swaps to provide dollars to foreign banks.