From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers

Baba, Naohiko; Packer, Frank

doi:10.1016/j.jimonfin.2009.08.003

Cited by 155 publications

(114 citation statements)

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“…In normal times, the traditional interest rate parity condition between an investment in the U.S. or the Euro area should hold 3 : Following this argumentation, investors should be indifferent between using the current exchange rate and investing in the U.S., thus, earning or investing in the Euro area earning and transferring the whole investment after maturity at the today expected rate in the next period 1 . Simply rearranging, the assumption of rational expectations and delay equation (1) by one period leads to:…”

Section: From Interest Rate To Monetary Base Paritymentioning

confidence: 99%

“…To do so, we will change the traditional interest rate parity to a monetary base parity, meaning that exchange rates movements are determined by the differing stance of monetary policy of the U.S. Federal Reserve (Fed) and the European Central Bank (ECB). Both central banks expanded to a differing degree their monetary base after the collapse of Lehman Brothers in September 2008 using quantitative measures to a different extent 1 . So, this expansion coincides with large cuts in the policy interest rates to historical lows leading to both central banks at least facing the zero lower bound (Figure 1).…”

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confidence: 99%

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Exchange rate movements in the presence of the zero lower bound

Klose¹

2017

Banks and Bank Systems

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Exchange rates are expected to adjust according to the stance of monetary policies, which are in normal times differences in interest rates set by the central banks. This interest rate parity does, however, no longer hold if central banks approach the zero lower bound on interest rates and switch to measures of quantitative easing. Therefore, the author estimates exchange rate changes based on the different stance of the monetary base, which is an indicator of differing monetary policies in the countries. The results reveal that indeed exchange rates movements in the Dollar-Euro-Rate can be explained by differences in the monetary base, since the zero lower bound has become binding. However, the influence depends crucially on whether the monetary base is increased or decreased and whether the other central bank is also expanding or reducing its balance sheet at the same time.

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Section: From Interest Rate To Monetary Base Paritymentioning

confidence: 99%

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confidence: 99%

Exchange rate movements in the presence of the zero lower bound

Klose¹

2017

Banks and Bank Systems

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“…Ako bližšie analyzujú Baba, Packer, Nagano [2008], Baba, Packer [2009], v tomto období došlo k výraznému odchýleniu od krytej úrokovej parity a nárastu bid-ask spreadov na trhu FX swapov i krížových swapov nad úroveň ich historickej hladiny. Výrazne narástol rozdiel medzi FX swapovou implikovanou sadzbou z USD a dolárovým Liborom.…”

Section: Vývoj Swapových Liniek Do Pádu Lehman Brothersunclassified

“…Významný jednostranný tok (order flow) na trhu menových swapov znamenal, že nezostal odolný voči finančnej kríze. Podľa [Baba, Packer, 2009] disalokácia na trhu FX swapov medzi troma hlavnými menovými pármi a USD bola spojená hlavne s rizikom protistrany a prémiou za nelikviditu. Náklady výmeny EUR, GBP do USD (implikovaná dolárová úroková sadzba) na trhu menových swapov boli výrazne väčšie ako USD Libor v odpovedajúcej splatnosti (graf 6 a 7).…”

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Federal Reserve Swap Lines - International Lender of the Last Resort

Titze¹

2016

AOP

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Federal Reserve Swap Lines -International Lender of the Last ResortAfter 2007, financial market turmoil began and shortage of dollar funding liquidity disrupted not only the US dollar funding market but also overseas. To address the shortage of dollar liquidity, the FED introduced swap lines with systematic important central banks, including emerging markets. The paper discusses the main feature of the FED's swap lines in the context of the funding pressures on the FX swap market. The main objective of the paper is to reveal technical aspects and effectiveness of the swap lines. The paper explains connectivity between un/secured money markets and the FX swap market during the financial and debt crises. The FX swap market was hit significantly. During the liquidity crisis of 2007-2010, the main driver of the deviation from covered interest parity was a shortage of dollar liquidity jointly with counterparty risk. During the debt crisis, the main driver was counterparty risk of the euro zone banks and sovereigns. The FED swap lines were used as a liquidity backstop. The paper concludes that the swap lines were an effective tool of cooperation between central banks and significantly alleviated the pressure on the FX swap market. In addition, the swap lines were flexible, supported financial stability, no losses were recorded, the problem of adverse selection was avoided and exit was successful. Finally, the swap lines have become a permanent tool for solving temporary shortages of foreign currency liquidity in national banking systems. (FX swap), ktorý bol výrazne poškodený krízou likvidity a následne dlhovou krízou v eurozóne. Spolu so zavedením Termínovanej aukčnej facility (ďalej "TAF") a uvoľnení tradičných operácií FED na voľnom trhu, čo malo zlepšiť podmienky na U.S. peňaž-nom trhu, vstúpil od decembra 2007 do bilaterálnych swapových liniek s Európskou centrálnou bankou (ďalej "ECB") a Švajčiarskou centrálnou bankou (ďalej "SNB"). Celkovo až 14 centrálnych bánk (vrátane rozvíjajúcich ekonomík) malo počas krízy likvidity prístup k swapovým linkám FED. Najväčšiu sumu čerpala ECB, ktorá reagovala na výrazný nedostatok dolárovej likvidity v eurozóne. Po vypuknutí dlhovej krízy v eurozóne, ktorá mala nepriaznivý dopad na trh menových swapov kvôli nárastu rizika protistrany, FED od mája 2010 obnovil swapové linky s ECB, SNB, Centrálnou bankou Anglicka (ďalej "BoE"), Japonska (ďalej "BoJ"), Kanady (ďalej "BoC"). Tie využila hlavne ECB, v menšom rozsahu BoJ.Kvôli významu dolára ako medzinárodnej zúčtovacej jednotky a rezervnej meny, FED začal plniť úlohu medzinárodného veriteľa poslednej inštancie (international lender of the last resort). FED správne pochopil, že má z praktického hľadiska len obmedzené možnosti priameho poskytovania dolárovej likvidity mimo U.S. Swapové linky FED boli vytvorené za účelom navýšiť kapacitu dolárových rezerv zahraničných centrálnych bánk, aby mohli poskytovať dolárovú likviditu vo svojich jurisdikciách.

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“…The future efforts need to start where it is most underdeveloped. It is well documented in literature that most emerging economies are experiencing tangible and substantial changes in the way they fund FX liquidity since the GFC (Baba & Packer, 2009). Despite the substantial changes in the way EMEs engage in FX funding, the stabilization measures are largely short-term fixes, not rigged into deeper and improved financial mechanism.…”

Section: Introductionmentioning

confidence: 99%

A Regional Repo Market Initiative for Global Financial Stability

Choi¹

2017

JEW

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The prevailing global financial system suffers from a shortage of good collateral for increased reliance on nonbank secured lending. Given that the global financial crisis was mainly triggered by the collapse of the collateral pool for dealer-based credit intermediation, this issue needs to be resolved quickly for normalized credit supply. Primarily, increased supply capacity for safe assets that can serve as valid collateral is the key agenda. This would be possible with a better use of USTs that are kept in EME silos and a broader recognition of an emerging market sovereign collateral pool. The inclusion of new collateral into the expanded and invigorated repo system that includes Asia would stabilize global capital flows and improve financial stability. In a related context, a market-driven, risk-mitigating regional repo market initiative would also bring balance to an increasingly market-driven financial ecosystem and mitigate the global shortage of safe assets.

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From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers

Cited by 155 publications

References 15 publications

Exchange rate movements in the presence of the zero lower bound

Exchange rate movements in the presence of the zero lower bound

Federal Reserve Swap Lines - International Lender of the Last Resort

A Regional Repo Market Initiative for Global Financial Stability

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