June 14, 2010
Currency Swaps Are Better Tool Than Reserves, BIS Study Shows
June 14 (Bloomberg) -- Swaps tend to be more effective at easing shortages of foreign currency than tapping a country’s own international cash reserves, according to a Bank for International Settlements study of South Korea.
The cost of borrowing dollars for South Korean banks soared at the end of 2008 as credit markets froze during the global financial crisis. Policy makers responded by first supplying dollars from the nation’s foreign reserves, then by swapping won for the U.S. currency with the Federal Reserve.
The currency swaps with the Fed “enhanced market confidence more effectively because they were adding to Korea’s foreign reserves,” according to the report, co-written by analysts Naohiko Baba and Ilhyock Shim and published in the BIS’s quarterly review today.
The report may back up South Korea’s proposal for a permanent arrangement for central banks to swap foreign currencies to help address future funding shortages. The Group of 20 nations refrained from endorsing the idea when they met in Busan, South Korea, this month and Fed Chairman Ben S. Bernanke last month opposed it.
“This result has an important implication for the current discussion in the G-20 on the strengthening global financial safety net,” the report said. “Even though building up a large amount of foreign reserves has certain merits as self-insurance, once a country faces a foreign liquidity run, swap lines with other central banks can have a powerful effect of complementing the use of foreign reserves and thus stopping the run.”
Lehman Collapse
Following the September 2008 bankruptcy of Lehman Brothers Holdings Inc., Korean authorities used the country’s foreign reserves to supply dollars to small companies and banks, who were “completely shut off from the international market for U.S. dollar funding,” the BIS said in the report.
The Bank of Korea entered a $30 billion swap deal with the Fed a month later to provide dollars locally. That arrangement expired in February.
Bank of Korea Governor Kim Choong Soo said in a speech on May 31 that a permanent swap arrangement could help establish a worldwide financial safety net and reduce the need for emerging economies to hoard foreign cash.
Bernanke said last month in Japan that while swap lines played an important role in establishing stability during the global financial crisis, “we don’t necessarily want to be providing a permanent service for financial markets.” He said authorities should instead press banks into better managing their funding needs across different currencies.
Currency Swaps Are Better Tool Than Reserves, BIS Study Shows
June 14 (Bloomberg) -- Swaps tend to be more effective at easing shortages of foreign currency than tapping a country’s own international cash reserves, according to a Bank for International Settlements study of South Korea.
The cost of borrowing dollars for South Korean banks soared at the end of 2008 as credit markets froze during the global financial crisis. Policy makers responded by first supplying dollars from the nation’s foreign reserves, then by swapping won for the U.S. currency with the Federal Reserve.
The currency swaps with the Fed “enhanced market confidence more effectively because they were adding to Korea’s foreign reserves,” according to the report, co-written by analysts Naohiko Baba and Ilhyock Shim and published in the BIS’s quarterly review today.
The report may back up South Korea’s proposal for a permanent arrangement for central banks to swap foreign currencies to help address future funding shortages. The Group of 20 nations refrained from endorsing the idea when they met in Busan, South Korea, this month and Fed Chairman Ben S. Bernanke last month opposed it.
“This result has an important implication for the current discussion in the G-20 on the strengthening global financial safety net,” the report said. “Even though building up a large amount of foreign reserves has certain merits as self-insurance, once a country faces a foreign liquidity run, swap lines with other central banks can have a powerful effect of complementing the use of foreign reserves and thus stopping the run.”
Lehman Collapse
Following the September 2008 bankruptcy of Lehman Brothers Holdings Inc., Korean authorities used the country’s foreign reserves to supply dollars to small companies and banks, who were “completely shut off from the international market for U.S. dollar funding,” the BIS said in the report.
The Bank of Korea entered a $30 billion swap deal with the Fed a month later to provide dollars locally. That arrangement expired in February.
Bank of Korea Governor Kim Choong Soo said in a speech on May 31 that a permanent swap arrangement could help establish a worldwide financial safety net and reduce the need for emerging economies to hoard foreign cash.
Bernanke said last month in Japan that while swap lines played an important role in establishing stability during the global financial crisis, “we don’t necessarily want to be providing a permanent service for financial markets.” He said authorities should instead press banks into better managing their funding needs across different currencies.
related article ~
*** Overinterpreting “Currency Swap Agreement”
*** Overinterpreting “Currency Swap Agreement”
