Liquidity lines between central banks are well-established instruments in the central banking policy toolkit, aimed at alleviating tensions in international funding markets. They are agreements, based on predefined terms, that enable central banks to receive currencies issued by other central banks in exchange for some form of collateral. Two basic types of financial instruments can be used to establish a liquidity line: swap agreements and repurchase agreements (often referred to as “repo agreements”).
The swap and repo lines have been used increasingly by the ECB and other major central banks since the 2008-9 global financial crisis. The ECB is part of a swap line network of standing bilateral arrangements with five other major central banks: the Bank of Canada, the Bank of Japan, the Swiss National Bank, the Bank of England and the Federal Reserve System.
In response to the coronavirus (COVID-19) crisis, the ECB swiftly reactivated existing swap lines with several central banks and set up new lines. It also set up temporary bilateral repo lines with several non-euro area central banks to accommodate the heightened demand for euro, or the potential thereof, initially during the pandemic and later following the Russian invasion of Ukraine. Based on recent experience, the ECB has adapted its framework for euro liquidity lines to enable it to respond to future funding shocks in a more agile manner. Liquidity lines established or prolonged after 15 January 2024 are assessed based on the revised framework described below.
Currency swap agreements
Currency swap agreements between two central banks are arrangements where the borrowing central bank obtains another currency in exchange for its own currency, which is provided as collateral. Both central banks agree to reverse the transaction and repay the borrowed currency, plus a contractually agreed interest rate, on a specified date.
Figure 1
Swap lines
The ECB provides euro against foreign currencies, which are accepted as collateral. Under reciprocal swap lines, the ECB may also receive foreign currency by providing euro as collateral.
Source: ECB. Notes: Illustration of the agreements in place as at 25 January 2024. For the current list of agreements, see the table below.
Many of the ECB’s swap agreements are reciprocal. This means that the ECB is able to (i) provide euro to a central bank while receiving foreign currency as collateral, and (ii) receive foreign currency from the issuing central bank while providing euro as collateral, whichever of the two is necessary in the circumstances. However, some ECB swap agreements only envisage the ECB providing euro to another central bank in exchange for foreign currency, issued by the requesting central bank and pledged as collateral with the ECB.
Repurchase agreements
Repo agreements are arrangements where the borrowing central bank obtains foreign currency for a specified period in exchange for financial assets that serve as collateral for the lending central bank. At maturity the borrowing central bank repays the borrowed currency plus a contractually agreed interest rate.
Under the Eurosystem’s repo facility for central banks (called EUREP), the ECB provides euro to non-euro area central banks and receives high-quality euro-denominated financial assets as collateral.
Figure 2
Repo lines
The ECB provides euro against adequate euro-denominated collateral accepted by the ECB.
Source: ECB.
Notes: Illustration of the agreements in place as at 25 January 2024. For the current list of agreements, see the table below.
What is the purpose of swap and repo lines?
The Eurosystem’s swap and repo lines are monetary policy instruments. They help prevent tensions in international funding markets from hampering the effectiveness of euro area monetary policy transmission.
When the ECB provides euro to non-euro area central banks, the liquidity lines address possible euro liquidity needs in non-euro area countries in the event of market dysfunctions. In particular, they help prevent forced asset sales by borrowing central banks, or heightened euro demand in non-euro area countries, that could exert upward pressure on euro area money market rates and impair their transmission to market yields. They can therefore prevent spillback effects on euro area financial markets and economies that might otherwise have an adverse impact on the smooth transmission of ECB monetary policy. Liquidity lines also help prevent euro liquidity shortages from turning into financial stability risks. Finally, they strengthen the role of the euro in international financial markets, thereby further enhancing the effectiveness of ECB monetary policy transmission.
When the ECB receives foreign currency from another central bank (for example US dollars from the Federal Reserve System) and provides euro as collateral, the liquidity lines ensure that funds in the foreign currency are continuously available to euro area banks. This prevents tensions in international funding markets from potentially impairing euro area banks’ access to foreign currency or increasing their funding costs, which may lead to abrupt deleveraging, extreme price movements and interruptions in the flow of credit.
The Eurosystem framework for liquidity lines
The ECB introduced a revised framework for liquidity lines, effective as of 16 January 2024. This framework retains the objectives and purpose of liquidity lines while establishing a single unified framework for the provision of euro liquidity. It can cope flexibly with future global or regional funding shocks or heightened risks thereof. In such circumstances, euro liquidity demand in non-euro area countries could increase, cross-border funding markets could be impaired and financial markets could be more fragile, warranting broader liquidity provision than in normal circumstances.
Swap lines continue to be available to countries with the highest creditworthiness and systemic importance from a euro area perspective, as well as countries with which reciprocal arrangements have been established (i.e. a backstop foreign currency liquidity facility for euro area banks).
Some ECB swap agreements are standing agreements with no end date, although either party may terminate them at any time. Other arrangements have a predefined end date but can be prolonged by mutual agreement.
Repo lines are available under uniform conditions as part of the EUREP framework. These conditions include the risk control framework and pricing, which may be adjusted by the Governing Council in accordance with monetary policy considerations. The risk control framework defines the requirements for the eligibility of collateral assets, the applicable valuation haircuts and a central bank-specific maximum borrowable amount.
All repo lines have a predefined end date but can be prolonged by mutual agreement. The establishment and prolongation of repo lines is based on the assessment of a monetary policy case. Such case is considered to be stronger with countries which have strong economic and financial relationships with the euro area and in the context of a global or regional crisis, or a heightened risk thereof, with potential adverse effects on ECB monetary policy transmission. Temporary lines established in the context of a global or regional crisis, or a heightened risk thereof, are terminated when conditions normalise.
Access to a euro liquidity line will, therefore, differ between normal circumstances and periods of financial market stress (or heightened risk thereof), when the establishment of liquidity lines with a broader set of countries could be warranted.
The Governing Council will continue to assess all requests for liquidity lines on a case-by-case basis.
All euro liquidity lines will be listed in the table below. Each entry will include the name of the non-euro area central bank, the type of liquidity line, the maximum borrowable amount in euro, the duration of the agreement and, in the case of a swap line, whether it is reciprocal.
