November 17, 2021

Most of the dollars issued via the Fed’s swap agreements return to US soil

On 16 June, the US Federal Reserve (Fed) extended its temporary swap agreements through 31 December 2021. This facility, which offers foreign central banks the possibility of obtaining dollars from the Fed and then lending them to local commercial banks, is not being drawn on much today, but it did help alleviate global pressures on the USD liquidity due to the Covid-19 shock. These swap agreements had already been set up during the 2008 financial crisis, albeit in a distorted manner, since they were largely used as a substitute for the discount window.

In the end, most of the liquidity lent by the Fed as part of these swap agreements was lent out again to the US branches of foreign banks to counter the abrupt drying up of the USD short-term debt market. This can be seen in the concomitant drawdown of swap lines and the swelling of net cross-border debt with…

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