Central bank swaps in the age of Covid-19

Joshua Aizenman, Hiro Ito, Gurnain Kaur Pasricha 08 April 2021



The arrival of Covid-19 instigated financial turmoil in March 2020. As in previous episodes of financial instability, the uncertainty made investors rush to hold US dollar-denominated assets, creating a dollar shortage. To mitigate acute strains in the offshore dollar funding markets and avoid a global systematic financial crisis, the Federal Reserve (‘Fed’) made US dollar liquidity readily available. They did so by reducing the pricing of swap operations, extending the maturity, and increasing the frequency of swap operations with the major central banks. The Fed had numerous swap lines with other central banks including the Bank of Canada (BOC), the Bank of England (BOE), the Bank of Japan (BOJ), the ECB, and the Swiss National Bank (SNB). On 19 March 2020, the Fed reactivated the swap lines it had established with nine central banks at the time of the 2008 Global Crisis and doubled their maximal lines.1

Further, on 31 March 2020 the Fed established a temporary repurchase agreement facility for foreign and international monetary authorities (also known as a ‘FIMA repo facility’). With this facility, the Fed could supply US dollar liquidity in exchange for existing US Treasuries held by foreign central banks and international institutions. The facility was expected to reduce the need for the sale of US Treasuries and mitigate pressure in this market. 

US dollar liquidity was actively provided to local markets through US dollar auctions by many central banks. First, in mid- to late-March 2020, auctions were run to the four major central banks (the ECB, BOJ, SNB, and BOE), and then by 12 other central banks (Figure 1). The auctions used US dollars obtained via swap lines with the Fed and were larger in magnitude than auctions by other central banks. The auctions by the other 12 central banks used either US dollars obtained via swap lines with the Fed or their own foreign exchange reserves.2 The US dollar shortage was mitigated by late June 2020, as was the demand for US dollar liquidity from major central banks. 

Figure 1 Many advanced and emerging-market central banks auctioned US dollars during the COVID-19 crisis

Given that the economic environment in the Covid-19 turmoil was different from that of the Global Crisis – which was a shock that originated in the US financial system – and given that the FIMA facility was added as another liquidity provision scheme, one may wonder whether the factors that led the Fed to provide dollar liquidity were different in this crisis compared to in 2008. In Aizenman et al. (2021), we assess the motivations for the Fed liquidity lines, the determinants of accessibility to liquidity lines and their actual use, and the effects and spillovers of US dollar auctions by central banks for about 50 economies in the immediate aftermath of the breakout of Covid-19. 

As for the question of what factors led the same nine central banks to be selected to receive swap liquidity lines, we find that the access to the liquidity arrangements is driven by the recipient economies’ close trade ties with the US. This result is in contrast with the previous episode of dollar shortage in 2008, when the US signed swap agreements with emerging economies due to their financial ties with the US (Aizenman and Pasricha 2010). The existence of formal military alliances was also a determinant for the Fed to reactivate the swaps for these economies.

Putting our results in the proper context, the conceptual differences between international reserves and emergency swap lines and emergency liquidity arrangements are noteworthy. The demand for international reserves is shaped by precautionary motives (i.e. ex ante insurance against future sudden stops and trade funding challenges) and possibly concerns about trade competitiveness – sometimes dubbed as ‘mercantilist’ motives (Aizenman 2008). In contrast, emergency liquidity arrangements and swap lines provided during the Global Crisis and the Covid-19 crisis provide liquidity relief. At times of financial crises, trade credits supplied by local banks may shrink even in economies experiencing currency appreciation – as banks may opt to reduce their risk exposure (Amiti and Weinstein 2009, 2011).3

While the number of economies that have swap agreements with the US is limited (i.e. 14 in total with five central banks with long-standing arrangements and nine reactivated), the newly created FIMA facility is available to economies which do not have any swap agreements, as long as they hold stocks of US Treasuries in their foreign exchange reserves which they can swap for dollars in the repo transactions. As a result, the sum of the maximal amount of swap agreement with the Fed and the amount of US Treasuries in the foreign exchange reserves holding of an economy can be regarded as the potential availability of liquidity lines from the Fed. Using this assumption, we find that higher US bank and trade exposure to an economy increased its access to dollar liquidity lines. Access to dollar liquidity also reflected global trade exposure, regardless of whether a country had more financial or trade ties with the US. 

The actual use of liquidity lines may differ from the availability of liquidity lines. Both the availability and the use of US dollar liquidity may affect market perceptions and conditions. The amounts auctioned by central banks were larger for currencies that faced greater exchange rate volatility, and when global financial conditions were more unstable. 

While providing dollar liquidity through a swap agreement or the FIMA facility can have economic impacts through alleviating dollar liquidity shortage, the mere announcement of these liquidity facilities can also have economic impacts. This is because such a policy announcement can affect economic agents’ expectations and consequently their behaviour (the confidence channel). We investigate the announcement effects of the liquidity arrangements on several key financial variables, finding that announcements of expansions in Fed liquidity facilities led to appreciation of partner currencies against the US dollar (i.e. US dollar depreciation), improved credit default swap spreads, and lowered the long-term interest rates of the recipient economies. 

US dollar auctions by economies’ own central banks led their home currencies to appreciate, although this effect was temporary (Figure 2). US dollar auctions by the four major central banks had more persistent appreciation effects on the home currencies of the non-major economies. This indicates that liquidity policies taken by the major central banks have important spillover effects on other economies.

Figure 2 Estimated effects of FX auctions on the depreciation rate of the home currency

It may be that the economic impacts of swaps and other liquidity policies or auctions can be greater for the economies that have financial or trade ties with the US. Rose and Spiegel (2012) find that the impact of swap auctions of dollar assets by foreign central banks is larger for economies that have more trade or financial linkages with the US. But our findings suggest that dollar liquidity policies have egalitarian impacts, irrespective of the extent of financial or trade ties. This suggests US liquidity-providing policies are nondiscriminatory, possibly benefiting economies regardless of the existence of established ties. This is consistent with the claim that the US Fed acts as ‘the lender of last resort’.

Our results are in line with Boissay et al. (2020), who note the growing importance of trade finance at times of lengthening global value chains (between 2000 and 2017).4 Baldwin and Freeman (2020) also highlight the magnification of the intermingling of trade and finance associated with deepening global value chains.5

The results of our paper also are in line with Gourinchas and Rey (2007), Obstfeld et al. (2009), and Gopinath et al. (2020), who analyse the ‘exorbitant privilege’ of the US dollar and the dominant currency paradigm. These considerations suggest that the Fed’s swap lines, and emergency liquidity provisions of the FIMA type, may affect most emerging and developing economies, including nations with limited trade and financial dealings with the US. For economies with greater trade and financial integration with the US, these effects tend to be more direct. For others, they are in the form of spillovers.    


Aizenman, J (2008), “Large hoarding of international reserves and the emerging global economic architecture”, The Manchester School 76(5): 487-503.

Aizenman, J and G K Pasricha (2010), “Selective Swap Arrangements and the Global Financial Crisis”, International Review of Economics and Finance 19(3): 353-365.

Aizenman, J, H Ito and G K Pasricha (2021), “Central Bank Swap Arrangements in the COVID-19 Crisis”, NBER Working Paper 28585. 

Amiti, M and D E Weinstein (2011), “Exports and financial shocks”, The Quarterly Journal of Economics 126(4): 1841-1877.

Amiti, M and D E Weinstein (2009), “Exports and Financial Shocks”, NBER Working Paper w15556.

Auboin, M (2009), “Restoring trade finance during a period of financial crisis: Stocktaking of recent initiatives”, WTO Staff Working Paper ERSD-2009-16.

Baldwin, R and R Freeman (2020), “Supply chain contagion waves: Thinking ahead on manufacturing ‘contagion and reinfection’ from the COVID concussion”, VoxEU.org, 01 April. 

Boissay, F, N Patel and H S Shin (2020), “Trade credit, trade finance, and the Covid-19 Crisis”, BIS Bulletin 24, 19 June.

Financial Times (2020), “Central banks scale back use of Fed’s emergency dollar swap lines”, 19 June.

Gopinath, G, E Boz, C Casas, F J Díez, P O Gourinchas and M Plagborg-Møller (2020), “Dominant currency paradigm”, American Economic Review 110 (3): 677-719.

Gourinchas, P O and H Rey (2007), “From world banker to world venture capitalist: US external adjustment and the Exorbitant Privilege”, in G7 current account imbalances: sustainability and adjustment, Chicago, IL: University of Chicago Press.

Rose, A and M Spiegel (2012), “Dollar illiquidity and central bank swap arrangements during the global financial crisis”, Journal of International Economics 88(2): 326-340.


1 They are the Reserve Bank of Australia (RBA), the Banco Central do Brasil (BCB), the Bank of Korea (BoK), the Banco de Mexico (BdM), the Monetary Authority of Singapore (MAS), the Sveriges Riksbank (Sweden, SR) with the maximal lines of $60 billion; and the Danmarks Nationalbank (DNB), the Norges Bank (Norway, NB), and the Reserve Bank of New Zealand (RBNZ) with the maximal lines of $60 billion. 

2 The Hong Kong Monetary Authority announced on April 22, 2020, the launch of a US dollar liquidity facility based on US dollars obtained via FIMA. In addition, central banks of Colombia and Chile announced on April 20, 2020 and June 24, 2020 respectively, that they had gained access to FIMA. 

3 See the case of Japan in 2008 reviewed by Amiti and Weinstein (2011). The appreciation the yen in 2008 coincided with collapsing trade credit in Japan, magnifying the contraction of international trade at times that ‘flight to safety’ induced yen appreciation. Amiti and Weinstein identify the presence of a causal link from shocks in the financial sector to exporters that result in exports declining much faster than output during banking crises. They concluded that the health of financial institutions is an important determinant of firm-level exports during crises. Since the evidence indicates that exporters in many countries are highly dependent on trade finance, these results imply that financial shocks are likely to play important roles in export declines in other countries as well.  Thereby, financial and trade shocks are intertwined in different ways across countries during crises. This pattern is in line with IMF-BAFT Survey (2009), reported by Amiti and Weinstein (2009), of 88 banks in 44 countries revealed that the average spreads on the letters of credit, export credit insurance, and short- to medium-term trade-related lending rose by 70, 107, and 99 basis points, respectively, in the second quarter of 2009 relative to the fourth quarter of 2007. See also Auboin (2009) review on trade credits before and during the GFC, noting that ‘While a number of public-institutions mobilized financial resources for trade finance in the fall of 2008, this has not been enough to bridge the gap between supply and demand of trade finance worldwide. As the market situation continued to deteriorate in the first quarter of 2009, G-20 leaders in London (April 2009) adopted a wider package for injecting additional liquidity and bringing public guarantees in support of $250 billion of trade transactions in 2009 and 2010.’ 

4 They also point out that the sharp appreciation of the dollar in the early stages of the Covid-19 crisis may have had knock-on effects to trade finance from stress in the banking system. Given the prevalence of the US dollar in trade financing, mitigating the impact of dollar credit fluctuations will be an important component of shielding global value chains from the pandemic’s economic fallout. Thereby, the recent expansion of central bank dollar swap lines and other measures to mitigate dollar liquidity conditions are likely to further cushion trade finance.

5 The COVID pandemic vividly illustrated the dependence of the US and the EU on the GVC as the source of critical medical supplies.  These considerations imply that we should take the econometric significance of the ‘trade factors’ in our regressions with a grain of salt: one needs micro data to identify more sharply the role of trade, finance and the interaction between the two.



Topics:  Covid-19 Financial regulation and banking Monetary policy

Tags:  US, Central Banks, Currency, the Fed, liquidity, banking, financial crises, COVID-19

Dockson Chair in Economics and International Relations, USC, and Research Associate, NBER

Professor of Economics, Portland State University

Senior Financial Sector Expert at the International Monetary Fund


CEPR Policy Research