The Federal Reserve’s Use of International Swap Lines

This Article focuses on the U.S. Federal Reserve\u27s 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 function. 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\u27 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\u27s swap line function must be rethought. The U.S. Federal Reserve\u27s 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\u27s 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\u27s 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\u27s 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\u27s Bank of China and the Bank of England and discussion of a swap line between the People\u27s 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 legalframework

The Federal Reserve as Last Resort

The Federal Reserve, the central bank of the United States, is one of the most important and powerful institutions in the world. Surprisingly, legal scholarship hardly pays any attention to the Federal Reserve or to the law structuring and governing its legal authority. This is especially curious given the amount of legal scholarship focused on administrative agencies that do not have anywhere near as critical a domestic and international role as that of the Federal Reserve. At the core of what the Federal Reserve does and should do is to conduct monetary policy so as to safeguard pricing, including that of financial risk. The recent financial crisis brings the importance of this role into clear resolution, because mispriced financial risk was central to the crisis. To increase the Federal Reserve’s efficacy, recent financial reforms in Dodd-Frank created a new “last-resort” role for the central bank. Ironically, these same reforms threaten the efficacy of the Federal Reserve by increasing “moral hazard,” which could lead to additional mispricing of financial risk. This Article aims to contribute to legal scholarship focused on the Federal Reserve, an institution whose decisions significantly impact financial markets and much of the rest of the world. In particular, the Article’s first aim is to argue that the Federal Reserve has a new, permanent last-resort role: market-maker of last resort. This new responsibility flows from reforms contained in Dodd-Frank’s Title VIII, which transform and expand the Federal Reserve’s last-resort-lending legal authority. This Article’s second aim is to argue that Title VIII’s market stability-oriented reforms require additional accompanying reforms to counterbalance the moral hazard and related mispricing of financial risk that Title VIII’s reforms could promote. These proposed reforms aim to ensure that the Federal Reserve’s new “last resort” lending role does not inadvertently encourage the excessive risk taking and mispricing of financial risk that brought us the financial crisis and Dodd-Frank in the first place

The Federal Reserve as Last Resort

The Federal Reserve, the central bank of the United States, is one of the most important and powerful institutions in the world. Surprisingly, legal scholarship hardly pays any attention to the Federal Reserve or to the law structuring and governing its legal authority. This is especially curious given the amount of legal scholarship focused on administrative agencies that do not have anywhere near as critical a domestic and international role as that of the Federal Reserve. At the core of what the Federal Reserve does and should do is to conduct monetary policy so as to safeguard pricing, including that of financial risk. The recent financial crisis brings the importance of this role into clear resolution, because mispriced financial risk was central to the crisis. To increase the Federal Reserve\u27s efficacy, recent financial reforms in Dodd-Frank created a new last-resort role for the central bank. Ironically, these same reforms threaten the efficacy of the Federal Reserve by increasing moral hazard, which could lead to additional mispricing of financial risk. This Article aims to contribute to legal scholarship focused on the Federal Reserve, an institution whose decisions significantly impact financial markets and much of the rest of the world. In particular, the Article\u27s first aim is to argue that the Federal Reserve has a new, permanent last-resort role: market-maker of last resort. This new responsibility flows from reforms contained in Dodd-Frank\u27s Title VIII, which transform and expand the Federal Reserve\u27s last-resort-lending legal authority. This Article\u27s second aim is to argue that Title VIII\u27s market stability-oriented reforms require additional accompanying reforms to counterbalance the moral hazard and related mispricing of financial risk that Title VIII\u27s reforms could promote. These proposed reforms aim to ensure that the Federal Reserve\u27s new last resort lending role does not inadvertently encourage the excessive risk taking and mispricing of financial risk that brought us the financial crisis and Dodd-Frank in the first place

The Federal Reserve as Last Resort

The Federal Reserve, the central bank of the United States, is one of the most important and powerful institutions in the world. Surprisingly, legal scholarship hardly pays any attention to the Federal Reserve or to the law structuring and governing its legal authority. This is especially curious given the amount of legal scholarship focused on administrative agencies that do not have anywhere near as critical a domestic and international role as that of the Federal Reserve. At the core of what the Federal Reserve does and should do is to conduct monetary policy so as to safeguard pricing, including that of financial risk. The recent financial crisis brings the importance of this role into clear resolution, because mispriced financial risk was central to the crisis. To increase the Federal Reserve’s efficacy, recent financial reforms in Dodd-Frank created a new “last-resort” role for the central bank. Ironically, these same reforms threaten the efficacy of the Federal Reserve by increasing “moral hazard,” which could lead to additional mispricing of financial risk. This Article aims to contribute to legal scholarship focused on the Federal Reserve, an institution whose decisions significantly impact financial markets and much of the rest of the world. In particular, the Article’s first aim is to argue that the Federal Reserve has a new, permanent last-resort role: market-maker of last resort. This new responsibility flows from reforms contained in Dodd-Frank’s Title VIII, which transform and expand the Federal Reserve’s last-resort-lending legal authority. This Article’s second aim is to argue that Title VIII’s market stability-oriented reforms require additional accompanying reforms to counterbalance the moral hazard and related mispricing of financial risk that Title VIII’s reforms could promote. These proposed reforms aim to ensure that the Federal Reserve’s new “last resort” lending role does not inadvertently encourage the excessive risk taking and mispricing of financial risk that brought us the financial crisis and Dodd-Frank in the first place

The Federal Reserve\u27s Supporting Role Behind Dodd-Frank\u27s Clearinghouse Reforms

This Article analyzes the Federal Reserve’s expanded role in payment, clearing, and settlement systems, particularly in connection with certain clearinghouses that have been designated by the newly created Financial Stability Oversight Council as “systemically significant.” The Federal Reserve’s expanded role is a little understood, but critical supporting component of domestic and international regulatory reforms to the $639 trillion over-the-counter (OTC) derivative markets. These reforms mandate the increased use of clearinghouses in OTC derivative markets. Due to critical reforms in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Federal Reserve is now positioned to ensure the stability of designated clearinghouses. Importantly, systemically significant clearinghouses are the quintessential “too big to fail” financial institutions

The Federal Reserve as Collateral\u27s Last Resort

This Essay is the first step in a broader normative project analyzing the proper balance between legislation and central bank policy—between architecture and implementation—in shaping the Federal Reserve’s collateral framework to best promote market discipline and to minimize credit allocation. Its modest aim is twofold. First, it provides the first analysis of central bank collateral frameworks in the legal scholarship. Second, it analyzes the equilibrium between legislation and central bank policy in the Federal Reserve’s collateral framework in the context of its section 13(3) emergency liquidity authority, lending authority for designated financial market utilities, and swap lines with foreign central banks, and general implications of these arrangements

The Federal Reserve\u27s Supporting Role Behind Dodd-Frank\u27s Clearinghouse Reforms

This Article analyzes the Federal Reserve’s expanded role in payment, clearing, and settlement systems, particularly in connection with certain clearinghouses that have been designated by the newly created Financial Stability Oversight Council as “systemically significant.” The Federal Reserve’s expanded role is a little understood, but critical supporting component of domestic and international regulatory reforms to the $639 trillion over-the-counter (OTC) derivative markets. These reforms mandate the increased use of clearinghouses in OTC derivative markets. Due to critical reforms in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Federal Reserve is now positioned to ensure the stability of designated clearinghouses. Importantly, systemically significant clearinghouses are the quintessential “too big to fail” financial institutions