In 2011, the ECB, in collaboration with the Bank of England, the Bank of Canada, the Bank of Japan, the Federal Reserve and the Swiss National Bank, set up a network of exchange lines to enable the central banks concerned to obtain money from each other. Since April 2020, swap lines have been used to lend funds to euro area banks in Swiss dollars and francs, as well as to British banks. The Fed has put in place several instruments to base liquidity on money market accounts and thus restore confidence at that time. Although often criticized by the national public as a “rescue” of foreign banks, liquidity swaps are structured to protect the interests of the lending bank and are often more selfish than purely altruistic.  The minutes of the 2008 U.S. Federal Reserve Open Market Committee (FOMC) meeting show that members focused on countries with large stocks of mortgage-backed U.S. dollar securities, which may be tempted to tip them all at the same time if they do not have access to the dollar, pushing up mortgage rates and hindering the U.S. recovery.  Similarly, the swap lines of the European Central Bank, the Swiss Central Bank and the Nordic Central Bank to Iceland and Eastern European countries in 2008 were largely due to the fact that households and businesses in these countries had euro and Swiss franc mortgages. Swap lines are created to respond to monetary pressures, but they can also serve other purposes. During the GFC, China established lines of exchange with six countries, which were also assumed to have promoted the central bank of China`s political objective of promoting non-dollar currencies as a trading and investment currency. (BIS, page 33).
In addition to U.S. dollar facilities, euro liquidity agreements are playing an increasingly important role. As early as 2013, the Eurosystem concluded a bilateral swat-change agreement with the People`s Bank of China, reflecting the deepening of trade and investment relations between China and the euro area. The ability to set swap and pension lines in euros with the Eurosystem is an important liquidity backstop for non-eurozone countries that make extensive use of the euro for financial and commercial transactions. By providing an effective backstop to private money markets, a broad framework of reliable liquidity agreements concluded by central banks reduces the risk of fluctuating euro financing costs. This increases the attractiveness of euro-based financial and commercial contracts. Empirical evidence shows that swap lines trigger portfolio inflows from the recipient country`s banks into assets denominated in the central bank`s liquidity-providing currency.  As a result, liquidity agreements help to build confidence in the country`s asset markets providing, while supporting global financial stability.  In addition, market turbulence in other markets can pose risks to euro area financial institutions. Although exposures on an aggregate basis are relatively low, specialized financial institutions may have a high level of exposure to certain geographic markets outside the euro area. These interconnections could have a negative impact on euro area markets in euro area markets. A wide network of liquidity agreements can help to stop these contagion and trust effects.
The COVID 19 crisis is an example. At the beginning of the crisis, the situation in the dollar financing markets deteriorated rapidly. Increased risk aversion has prompted players around the world to try to increase their stocks of U.S. dollars. The cost of short-term borrowing in U.S. dollars has also risen sharply for euro area players (see Chart 2).  In a concerted effort, the Federal Reserve, the ECB and four other major central banks responded by improving the provision of liquidity in U.S. dollars through their U.S. dollar liquidity swap line agreements.  The cost of this swap facility was nett