Central Bank Cooperation in Times of Crisis, Governor Elizabeth A. Duke At the Center for Latin American Monetary Studies 60th, Anniversary Conference, Mexico City, Mexico. July 20, 2012
“As the Federal Reserve and other central banks worked to address liquidity shortages in their own markets, it became clear that, as a result of globalization, firms were experiencing funding shortages not only in domestic currencies, but in foreign currencies as well. In particular, dollar funding shortages appeared not just in the United States but in countries around the world, which, in turn, exacerbated pressures in U.S. funding markets. The Federal Reserve already was providing liquidity to foreign financial firms operating in the United States through its discount window and other facilities. To further address pressures in dollar funding markets and support the flow of credit to U.S. families and businesses, the Federal Reserve ultimately approved bilateral currency swap arrangements with 14 foreign central banks, including two Latin American central banks.2 Under these swap arrangements, in exchange for their own currencies, foreign central banks obtained dollars from the Federal Reserve to lend to financial institutions in their jurisdictions. These swap arrangements pose essentially no risk to the Federal Reserve: They are unwound (with a fee paid by the central bank drawing on the swap arrangement to the Federal Reserve) at the exact same exchange rate that applied to the original transaction, they are conducted with major central banks with track records of prudent decisionmaking, and they are secured by the foreign currency provided by those central banks.”
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