Document Type

Case Study

Case Series

Central Bank Swap Lines


The devaluation of British sterling in November 1967 caused major disruptions in currency markets; led to concerns that the US dollar, the lynchpin of the global gold standard system, would also devalue; and threatened the stability of financial markets, particularly the market for US dollars overseas. The Federal Reserve and European central banks used a network of preexisting swap lines in the ensuing weeks to stabilize exchange rates, defend the gold standard, and calm global markets. In most cases, central banks used these swaps to stabilize exchange rates. However, the main purpose of several of these swaps was arguably to ensure US dollar liquidity in markets outside the United States in the wake of the sterling devaluation. For that reason, they are relevant to the New Bagehot series, which seeks to draw lessons about crisis-management tools that promote financial stability. This case focuses on the Federal Reserve’s collaborations with the Bank for International Settlements (BIS) and West Germany’s central bank, the Deutsche Bundesbank, to provide dollar liquidity to the eurodollar market at the end of 1967. In these arrangements, the parties used the swaps to acquire dollars that they could then lend to European banks. The BIS drew USD 346 million on its line with the Fed; in an unusual arrangement, the Fed provided USD 300 million to the Bundesbank by drawing on its swap line. The BIS fully repaid all swap obligations by January 1968. The Fed fully repaid all swap obligations to the Bundesbank by March 1968. The Federal Open Market Committee authorized the expansion of the BIS and German facilities to USD 1 billion on March 17, 1968.