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
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.