Currency Swaps and the Moral Hazard
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. The existence of swaps therefore makes restraints on banks’ reliance on short-term funding, and requirements that foreign banks hold high quality, liquid, local currency assets, all the more important.
Same issue was happening in the South East Asia region. The region’s central banks had some bilateral and multilateral swap lines agreements among them and with external ‘surplus’ developed economy such as with PBOC of China, BOJ of Japan, the Fed and the Reserve Bank of Australia. Although the intention was clear such as to ensure stability, it could lead to complacency in the long run.
The region’s central banks went to the extent of creating a communal forum called SEACEN (South-East Asia Central Banks) with headquarter in Kuala Lumpur, Malaysia. Since its inception in the early 1980s, the SEACEN Centre has established its unique regional position in serving its membership of central banks in the Asia-Pacific region through its learning programmes, research work, and networking and collaboration platforms for capability building in central banking knowledge.
Over the years, SEACEN has built a wide network base, in that besides its members, the Centre has an outreach of 15 other central banks and monetary authorities which are invited for the Centre’s learning programmes, as well as 26 regional and international strategic partners with whom the Centre collaborates in the design and delivery of its programmes in central banking knowledge areas (Macroeconomic and Monetary Policy Management; Financial Stability and Supervision; and Payment and Settlement System) and Leadership and Governance.
The common intention though widely stated as ensuring economic stability especially on the FX side, however, was not really as stated publicly. For example, the Bank of Indonesia (Indonesian’s Central Bank) Governor Perry Warjiyo during the occasion of signing swap lines agreement with RBA of Australia said that the agreement would help expand the trade between the two countries because the transactions could be implemented by using the local currencies.
“The extension of the agreement reflects the wish to strengthen financial cooperation between Indonesia and Australia. Each country could use their respective currencies in the bilateral trade to reduce dependency on US dollar,” Parry added.
So it was about reducing dependency on the US dollar which could inflict some threat to US Dollar as global currency to go to in which they could pose far more serious threat to US economy as they had run serious amount of debts as countries worldwide had started trading in their own currencies and to reduce their US Dollar foreign currency holdings. The threat to US economy is far more serious now especially with the recent ongoing trade spat with China and the smell of another global crisis is ripe in the air.https://straitsjournal.com/future-crisis/ASEANBanking & FinanceGlobalLatest Thinkingcrisis,currency,financial,swap,us dollarIn 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...escveritas [email protected]AdministratorThe Straits Journal