Abstract

This Article focuses on the U.S. Federal Reserve's controversial practice of loaning U.S. dollars to foreign central banks, which the foreign central banks then turn around and loan to institutions in their jurisdictions. The Federal Reserve does not know the identity of these recipient institutions. Nevertheless, these loans—termed "swap lines"—provide foreign financial institutions the type of financial stability that the U.S. Federal Reserve was created to provide for U.S. banks during times of crises. During the financial crisis, the U.S. Federal Reserve arranged swap lines with 14 foreign central banks for a total amount of $583 billion, making it the de facto international lender of last resort. In December 2012, the U.S. Federal Reserve once again extended the duration of its swap line function.

In this Article, I argue that because of U.S. dollar dependencies and stability risks in global financial markets, and because of the global financial markets' dependency on the U.S. dollar, an international dollar lender of last resort is needed. The U.S. Federal Reserve is currently the institution best positioned to fill this role. Yet, I also argue that because of the potential problems, risks, and costs of this role, the U.S. Federal Reserve's swap line function must be rethought. The U.S. Federal Reserve's swap line authority relies upon an interpretation of statutory provisions in the Federal Reserve Act dating back to its origins in 1913. The institutional structure of today's global, interconnected financial markets bears little resemblance to that existing in 1913. This has left the swap line function open to undue problems and risks and allows for the possibility of problematic future overseas expansions.

Accordingly, my Article proposes a new, distinct framework for the U.S. Federal Reserve's swap lines. The first prong of this framework provides for a new market stability role for the U.S. Federal Reserve and provides for significant flexibility in its emergency lending operations. The second prong of this framework provides boundaries for this new flexibility, including limiting future extensions of the swap lines and bolstering democratic accountability in their use.

Rethinking the U.S. Federal Reserve's swap line function is an urgent task. Central bank swap lines are set to become key structural and competitive features of global financial markets. The recent establishment of a bilateral swap line between the People's Bank of China and the Bank of England and discussion of a swap line between the People's Bank of China and the Bank of France to promote London and Paris as offshore renminbi trading centers attest to this fact. In sum, this Article argues that the use of swap lines can be a significant aid in enabling the Federal Reserve to act as the international dollar lender of last resort—and, thereby, foster domestic and international financial market stability—but that this public objective cannot be reached unless the swap lines themselves are grounded in a thoughtful, practical, and forward-looking legal framework.

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