International liquidity provision and currency-specific liquidity shortages

In this paper we discuss the main innovation in central bank cooperation during the financial crisis of 2008-09, namely the emergency provision of international liquidity through the establishment of bilateral central bank swap facilities, which have evolved to form interconnected swap networks. Based on the BIS international locational banking statistics, we present a measure of currency-specific liquidity shortages for the US dollar, the euro, the yen, the pound sterling and the Swiss franc for a large number of advanced and emerging economies. We discuss the reasons for establishing swap facilities, relate our measure of currency-specific liquidity shortages to the probability of a country receiving a swap line in that currency, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We find that countries with larger US dollar shortages on our measure, and economies that are large international financial centres, have a statistically significantly higher probability of receiving a US dollar swap line. We also find that actual US dollar funding obtained by drawing on the Fed’s swap lines at end-2008 was statistically significantly larger for economies with higher US dollar shortages on our measure, as well as for economies which are large international financial centres.