In conjunction with the establishment of the ACF, the staff proposes that the FOMC authorize temporary reciprocal currency arrangements with the European Central Bank and the Swiss National Bank. These facilities would provide dollar financing for parallel credit auctions for euro area and Swiss banks, which the staff understands would be conducted in a manner broadly similar to that provided for U.S. banks by the ACF, which Sandy just described. The proposal is for swap arrangements that would authorize the ECB and the SNB to draw up to $10 billion and $5 billion, respectively, each week with individual draws for a period of twenty-eight days. Cumulative totals may reach $40 billion for the ECB and $20 billion for the SNB. The swap arrangements would expire after six months unless renewed. The purchases of U.S. dollars with foreign currency would be based on the prevailing spot exchange rate, and the ECB and the SNB would charge their banks and pay interest on the swap at the rate established each week by the U.S. auction.
These temporary swap arrangements are proposed so that dollar funding problems now faced by European banks, particularly at terms longer than overnight, can be addressed in a parallel manner and at the same time that dollar funding problems of U.S. banks are addressed. Improved conditions in European dollar trading would guard against the spillover of volatility in such trading to New York trading and could help reduce term funding pressures in U.S. markets. Establishment of these swap lines in parallel with the ACF could have broad, positive confidence effects. Given the financial positions of these two central banks, the swap lines would involve virtually no credit risk on our part. By providing dollars to the ECB and the SNB to use in their efforts to address the term dollar funding problems in Europe, we benefit the credit markets without ourselves providing support to banks overseas.