CENTRAL BANK CURRENCY SWAPS TRACKER

The following information was released by the Council on Foreign Relations (CFR) :

Introduction

Since the financial crisis of 2007, central banks around the world have entered into a multitude of bilateral currency swap agreements with one another. These agreements allow a central bank in one country to exchange currency, usually its domestic currency, for a certain amount of foreign currency. The recipient central bank can then lend this foreign currency on to its domestic banks, on its own terms and at its own risk.

Swaps involving the U.S. Federal Reserve were the most important of all the cross-border policy responses to the financial crisis, helping to alleviate potentially devastating dollar funding problems among non-U.S. banks. Fed swaps again helped to prevent global dollar shortages in early 2020, when the spread of the COVID-19 pandemic plunged the world into deep recession. Over the last decade, China has tried to position itself as a global lender of last resort, extending swap lines to indebted countries mired in balance of payments and sovereign debt crises. Thirteen of the seventeen countries that have drawn on their swap lines with China have done so to fortify their foreign reserves, with amount outstanding hitting a high in 2023.

The sections below explain how currency swaps work and highlight major developments in the currency swap arrangements of the three largest central banksthe Federal Reserve, the European Central Bank, and the People's Bank of China. Each section traces how these three central banks shaped the evolution of the global swap network mapped in the interactive.

How Swaps Work

A bilateral currency swap agreementgenerally followsa simple process:

Initial Exchange: Central Bank 1 (e.g., theEuropean Central Bank) sells a specified amount of its currency (Currency A) to Central Bank 2 (e.g., theFederal Reserve) in exchange for Currency B (e.g.,dollars) at the prevailingexchangerate.

Use of Foreign Currency for Lending: Central Bank 1 lends Currency B to its domestic banks or corporations to alleviate foreign currency shortages.

Repayment and Unwinding: On a predetermined future date, Central Bank 1 repurchases its currency (Currency A) at the original exchange rate, paying interest to Central Bank 2 at a contractually agreed rate.

Depending on the terms of the arrangement, swap lines are unidirectional or reciprocal. Following the above example, if a swap line is unidirectional, Central Bank 2 agrees to provide liquidity to Central Bank 1 against Currency A, which serves as collateral. If a swap line is reciprocal, Central Bank 1 can also provide liquidity to Central Bank 2 against Currency B. Some agreements involve a third currency, where Central Bank 1 (e.g., Bank of Japan) agrees to provide liquidity to Central Bank 2 (e.g., Bank of Indonesia) in Currency A (e.g., yen) as well as Currency C (e.g., dollars). While both unidirectional and reciprocal agreements exist, most swap lines are de facto unidirectional, with the largest central banks providing funds in response to crisis-driven liquidity shortages.

From the Archives

Currency swaps in the above interactive show amount outstanding from agreements between two central banks. It is important to note, however, that swap lines can in some cases be financed by other government entities. The U.S. Treasury, for example, has extended a $20 billion swap line to the Argentine central bank, while Japan's Ministry of Finance has maintained swap lines with the central banks of Indonesia, the Philippines, Thailand, Malaysia, Singapore, India, and South Korea. These treasury facilities are secured loans dressed in swap form. While uncommon, such arrangements can provide a valuable financial safety net for developing economies.

While swaps are structured to hedge against currency fluctuations, risks remain if a central bank fails to honor the agreement. This makes swaps a significant gesture of political trust. As such, they have drawn scrutiny: U.S. legislators criticized the Fed's 2008 swaps as "bailing out" foreign banks, while Chinese "netizen" commentators have questioned the risks of the PBoC lending to unstable economies like Russia and Argentina.

Federal Reserve Swaps

Global Financial Crisis (2007-2008)

On December 12, 2007, the Federal Reserve extended swap lines to the European Central Bank (ECB) and Swiss National Bank (SNB). European bank demand for dollars had beenrising, and creating accentuated volatility in, U.S. dollar interest rates.According to apress releasebytheFed, the swap lines were intended "to address elevated pressures in short-term funding markets," and to do so without the Fed having tofundforeign banks directly.

On September 16, 2008, two days after the collapse of Lehman Brothers,theFederal Open Market Committee (FOMC)gave the foreign-currency subcommittee the power "to enter into swap agreements with the foreign central banks as needed to address strains in money markets in other jurisdictions." This enabled the subcommittee to extend swap lines to other centralbanks,and to expand the size of the existing swap lines, without the need for the full FOMC to vote on it. The oral understanding was that the subcommittee would have the authority to extend swap lines to Group of Ten (G10) central banks, but that swaps beyond that group would require approval by the full FOMC. Two days after the subcommittee was granted this power, the Fed expanded the size of the swap lines with theeurozone and Switzerland, and extended three new swap lines,toCanada, the United Kingdom (UK), and Japan. On September 24, 2008, further swap lines were extended toAustralia, Denmark, Norway, and Sweden. On October 28, 2008, a swap line was extended toNew Zealand.Lending throughthese swaplines reached a maximum of$586 billionin December 2008.

Both the State Department and the Treasury were consulted about which countries fit the criterion laid out bytheFed, which was that "intensification of stresses in [these countries] could trigger unwelcome spillovers for both the U.S. economy and the international economy more generally." The transcript of the FOMC meeting at which the final decision was made shows that members had very specific concerns, such as whether countries with large holdings of mortgage-backed securities issued by Fannie Mae and Freddie Mac might be tempted to dump them all at once if they lacked easier access to dollars, thereby forcing up mortgage rates and impeding recovery in the United States. In his bookInternational Liquidity and the Financial Crisis, William Allen provides estimates for a series of countries on the gap between the amount of bank liabilities in a particular currency that needed to be refinanced and the funds available for this purpose. Of theseeconomies, the Brazilian banking system had the greatest dollargapand the Korean banking system had the greatest gap among Asian banking systems. The Fed swaplineshelped fill these dollar gaps andlowereddollar interest rates.

COVID-19 Pandemic (2020)

By March 2020, the COVID-19 pandemic had pushed the global economy into deep recession, with governments' public-health orders directing nearly half the world's population to stay indoors. The cratering economy raised counterparty risk and sent borrowers scrambling for cash, which drove up the cost of lending. Just as during the 2007 crisis, developed-world central banks turned to swap lines to provide their domestic banks with foreign currency.

To expand U.S. dollar liquidity, the Federal Reserve, on March 15, cut the interest rate on its outstanding developed-world swap lines to just above zero. The Bank of Canada, Bank of England, European Central Bank, Bank of Japan, and Swiss National Bank also pledged to use their Federal Reserve swap lines to lend dollars at a maximum maturity of84 days. Later that month, the Fed extended emergency swap lines to five more developed-country central banksthose of Australia, Denmark, New Zealand, Norway, and Sweden. Australia and Sweden werepermittedto draw up to$60 billion; the lines for Denmark, New Zealand, and Norway were capped at$30 billion. Fed officials approved each swap line for six months but, in July 2020,renewedthem all until March 2021.

Throughout 2020, most of the Fed's counterparty central banksall but those of Canada, New Zealand, and Swedendrew upon their U.S. dollar swap lines. Japan was by far the largest user, with its outstanding withdrawals peaking atroughly$225 billion.Whereas the Fed's emergency swap lines of 2020 have expired, itmaintainspermanent swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Mexico, and the Swiss National Bank.

As it did during the Global Financial Crisis, the Fed again extended swap lines to select emerging-market central banks during the pandemic. The Fed approved emergency lines on March 19 for Brazil, Mexico, South Korea, and Singaporethe same nations that had received them in 2008. As with its emergency developed-world swap lines, the Fed approved the lines for six months and later renewed them through the following March. The Fed's emergency swap line agreements with Brazil, South Korea, Mexico, and Singapore expired in 2021.

Global Financial Crisis (2007-2008)

The ECB established swap lines with Sweden in December 2007, Switzerland and Denmark in October 2008, and the UK in December 2010. The euro area, Sweden, Denmark, and the UK had relatively low foreign exchange reserves going into the crisis, owing to the costs involved in holding reserves and the belief that there was little likelihood that more would be needed in the foreseeable future. However, banks in these countries borrowed large sums in foreign currencies in the years leading up to the crisis. When it became difficult for them to borrow funds in 2008, they turned to their central banks, reserves of which proved insufficient to meet the unanticipated demand. The ECB swap lines were therefore called into use in 2009 to provide Sweden and Denmark euros with which to top up their foreign exchange reserves, and the swap line with Switzerland was called upon to provide the ECB with Swiss francs. The swap line with the Bank of England was put in place as a precautionary measure to ensure that the Central Bank of Ireland, which is part of the Eurosystem, had access to pounds sterling, but it has never been used. Since 2007, Sweden and Denmark have more than doubled their foreign exchange reserves, the UK has doubled its reserves, and the euro area has increased its reserves by 20 percent.

The ECB initially agreed to provide euros to Hungary, Latvia, and Poland only through repurchase agreements, in which securities rather than currency are held as collateral, but eventually extended temporary swap lines to Hungary and Poland. Switzerland also provided Swiss francs to Poland and Hungary in exchange for euros. Many households in Poland and Hungary had taken out foreign-currency-denominated mortgages because of the lower interest rates available on these loans. Demand for Swiss francs and euros from the Hungarian and Polish banks that issued the loans drove up borrowing costs in these currencies; the swap lines were intended to alleviate the upward pressure this demand was placing on euro and Swiss franc interest rates.

COVID-19 Pandemic (2020)

OnMarch 20, 2020, the ECBreactivated a swap line with the DanishNational Bankthe first of its measures tostabilize markets amidst the COVID-19 pandemic.In April, the ECB approved a temporary line to Croatia, andsevendays later it granted one toBulgaria.While the pandemicconsiderably strainedthe U.S. dollar funding market,as market participants rushed tohold more of the world's reserve currency, global markets for eurosremainedrelatively calm.Assuch, all three of the newly extended swap lines were not activated.

Over the course of the pandemic's early months, the ECB also established repurchase agreements with Romania, Albania, North Macedonia, San Marino, Hungary and Serbia. While swap linesextended only to countries with the highest creditworthinessare backed by the borrowing bank's foreign currency, repo lines extended by the ECB require high-quality euro-denominated financial assets as collateral. Without having to rely on the standing of a foreign currency, repo lines are more freely extended to non-euro area countries. Accordingly, the Eurosystem Repo Facility for central banks (EUREP) will be available to nearly all foreign central banks starting in the third quarter of 2026, further expanding the euro's role beyond the Eurosystem and into global markets.

PBoC Swaps

For the Fed and the ECB, the extension of swap lines has concentrated around global crisis periods. The People's Bank of China (PBoC), however, has expanded its network of currency swaps steadily and more broadly to developing economies. Since 2009, China has signed bilateral currency swap agreements with over 40 counterparties.

The stated intention of these swaps is to support trade and investment and to promote the international use of RMB. Broadly, China limits the amount of RMB available to settle trade, and the swaps have been used to obtain RMB after these limits have been reached. In October 2010, the Hong Kong Monetary Authority and the PBoC swapped 20 billion yuan (about $3 billion) to enable companies in Hong Kong to settle RMB trade with the mainland. In 2014, China used its swap line with Korea to obtain 400 million won (about $400,000). The won were then loaned on to a commercial bank in China, which used them to provide trade financing for payment of imports from Korea.

In reality, however, the PBoC uses swaps primarily as a substitute for collateralized lending to heavily indebted countriescountries which either owe large sums to Chinese institutions or are deemed important to China geostrategically. These swaps are much more expensive than Fed swaps, andgiven frequent rolloversare typically for much longer terms.

At least 13 countries have drawn on PBoC swap lines to stabilize their central bank reservesmost notably, Argentina. Argentina had difficulty borrowing dollars on international markets after it defaulted on its debt in July 2014, and faced shortages on a range of imported goods as a result. The PBoC provided the Argentine central bank with RMB which, it agreed, could be sold as necessary to service external dollar debt. The RMB swap therefore operated as a surrogate for dollars potentially needed to pay creditors. In 2023, Argentina drew on the swap line to avoid defaulting with the IMFpaying directly in RMB.

Argentina's use of PBoC swaps is just one of a growing list of cases of developing economies relying on rolling short-term (3-12 months) RMB funds to repay debts or hide shortages of reserves. Pakistan has drawn heavily on a PBoC swap line to repay foreign debtsparticularly those owed to Chinese state-owned financial institutions under China's massive "Belt and Road" foreign infrastructure lending initiative. Pakistan first drew on the line to offset its balance of payments deficit in May 2013, allowing the country to report a positive balance and stabilize its currency. Since 2013, however, Pakistan has drawn on its line every year to finance its external debtwith the amount drawn ballooning from $820 million to $4.3 billion in 2025. In bailing out Pakistan, and other Belt and Road borrowers such as Sri Lanka and Mongolia, China is effectively using its central bank to bail out its own lending institutions through a roundabout means.

Much as the Fed faced domestic criticism for "bailing out European banks" during the financial crisis, the PBoC was subjected to public chiding for signing a swap agreement with the Bank of Russia shortly before the plunge in the value of the ruble in late 2014after Russia was hit with Western financial sanctions. The PBoC felt compelled to respond through Chinese social media, explaining that swaps were collateralized based on the exchange rate prevailing at the time they are actually used, and not at old rates prevailing at the time agreements are signed. Past movements in the value of the ruble were, therefore, irrelevantthe Bank was, in fact, well protected. But the controversy highlighted how politically sensitive the issue of swaps had become in an era of global financial turbulence.

In 2024, China continued to expand its network of bilateral swap lines, entering into agreements with Saudi Arabia and Mauritius. The Saudi arrangement is designed to serve the official purpose of PBoC swap lines and facilitate greater use of RMB for bilateral trade settlement. However, most recent agreements and drawssuch as those with Argentina and Pakistanhave instead provided emergency reserves to highly indebted developing countries. Owing to the short-term nature of these swaps, they fall outside existing international debt disclosure requirements, despite the fact that they are often rolled over continuously for many years. This anomaly complicates analysis of borrower financial conditions by the IMF, World Bank, and other lenders. Other countries have followed China's strategy and begun using swaps to bolster commercial and diplomatic ties with heavily indebted nations. In an apparent bid to boost its regional influence, the UAE, for example, extended local-currency swap lines to Turkey in 2022, to Egypt in 2023, and to Ethiopia in 2024.

The Future of Swaps

In October 2008, then New York Fed President Timothy Geithner observed that Europe "ran a banking system that was allowed to get very, very big relative to GDP, with huge currency mismatches and with no plans to meet the liquidity needs of their banks in dollars in the event that we face a storm like this." While the swap lines prevented fire sales of assets and other actions that would have exacerbated the crisis, the fact that the swap lines now appear permanent may actually encourage these "huge currency mismatches" to grow. Banks will now expect their central banks to provide them with foreign currency if market stresses once again make this funding difficult to obtain in private markets, and those who lend to foreign banks will continue to do so in the expectation that, in a crisis, they will be repaid with funds borrowed from the central bank.

Currency funding constraints, however, are a challengelargely specificto the Fed and ECB swap networks;the PBoC's swap linespresent a different problem entirely.The Fed'spermanent swap linesaregenerallyextendedto banking systemsthatface temporary dollar-funding shortages during periods of global market stress. Drawings spike in crises and unwind quickly as private markets normalize. The PBoC, by contrast, has extended swap lines to overfortycentral banks, andmore than three-quartersofits partners have drawn on them not to address banking-sectorcurrencymismatches but tosupportbalance-of-payments positions. In severalcases,central banks have rolled over their RMB swap drawingscontinuously, converting what was designed as short-termfinancinginto de facto long-term balance-of-payments lending. Where the Fed's swaplines risk enabling currency mismatches in private banking, the PBoC'sallowgovernments to defer structural adjustmentsbyfinancingreserves with borrowedfunds.The existence of swaps therefore makes restraints on banks' reliance on short-term fundingandrequirementsthat foreign banks hold high-quality, liquid, local-currency assetsallthe more important.