The Trump Administration’s willingness to abrogate treaties (including those negotiated under the previous Trump Administration) makes U.S. allies doubt a whole host of commitments on which they currently rely. In this post, we focus on the Federal Reserve’s central bank liquidity swaps, which provide a key backstop for global markets in dollar assets. At least twice in the past two decades, this esoteric tool played a major role in sustaining the dollar-based financial system outside the United States, thereby insulating the U.S. financial system from the default, market, and liquidity risk of foreign intermediaries.

Given the crisis-management role that the dollar swap lines play, we can think of no reason why the Fed itself would wish to end them. However, if the Administration or the Congress were to perceive the Fed swap and repo facilities as supporting only foreign institutions, or if they view these facilities as a device to influence foreign behavior, it is easy to imagine pressure on the Fed to drop these crisis prevention and crisis-management tools or to make them conditional.

In this post, we explain what the swap lines are, how they operate, and how an end to the swap lines could lead to financial instability within the United States as well as undermine the use of the dollar and dollar-denominated assets in the global financial system. We then consider how foreign central banks might insulate their banking systems against the risk that they could no longer rely on the swap lines.

Steve Cecchetti and Kim SchoenholtzAugust 10, 2025Federal Reserve, Primer, Liquidity swaps, Repo, FIMA repo facility, Eurodollars, Financial instability, Bank runs, Panic, International transmission, Externality, Spillovers, Lender of last report

Central Bank to the World: Supplying Dollars in the COVID Crisis

In his comments at Jackson Hole last year, then-Bank of England Governor Mark Carney highlighted the continuing dominance of the U.S. dollar: it accounts for one-half of global trade invoicing; two thirds of emerging market external debt, official foreign exchange reserves, and global securities issuance; and nearly 90 percent of (one leg of) foreign exchange transactions.

It also is the basis for the Global Dollar system (see our earlier post). The BIS reports that short-term U.S. dollar liabilities of non-U.S. banks total $15 trillion. Foreign exchange forward contracts and swaps—with a gross notional value of more than $75 trillion—add substantially further to U.S. dollar exposures (see here). And, the U.S. Treasury reports that foreigners hold more than $7 trillion of U.S. Treasury securities. To put these numbers into perspective, total assets of U.S. depository institutions are currently $20 trillion. In other words, the U.S. dollar financial system outside of the United States is larger than the American banking system.

Like it or not, the Federal Reserve is the dollar lender of last resort not just for the United States, but for the entire world. The Fed’s role is not altruistic. Instead, it reflects the near-certainty that, in a world of massive cross-border capital flows, dollar funding shortages anywhere in the world will spill back into the United States through fire sales of dollar assets, a surge in the value of the dollar, increased domestic funding costs, or all three.

The Fed’s extraordinary efforts to counter the COVID-19 crisis include aggressive actions to counter dollar shortages outside the United States. In this post, we explore those actions, including the supply of dollar liquidity swaps to 14 central banks (“friends of the Fed”) and—to limit sales that might disrupt the Treasury market—the introduction of a repo facility to provide dollars to the others. We also note the challenges facing countries outside the small inner circle that do not have immediate access to the Fed’s swap lines….

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Money, Banking, and Financial Markets