Can a central bank provide foreign currency funding to its counterparties?

Yes, it can. Liquidity lines between central banks are well-established instruments in the central banking policy toolkit, aimed at alleviating tensions in international funding markets. They are framework agreements that enable central banks to receive currencies issued by other central banks in exchange for some form of collateral based on predefined terms. Two basic types of financial instrument can be used to establish a liquidity line: a swap agreement and a repurchase agreement.

Swap and repo lines have been increasingly used by the European Central Bank (ECB) and other major central banks since the global financial crisis. Specifically, the ECB is part of a swap-line network consisting of standing bilateral arrangements with five other major central banks (the Bank of Canada, the Bank of Japan, the Swiss National Bank, the Bank of England and the Federal Reserve System) to provide liquidity in other currencies to euro area counterparties. During the global financial crisis, the ECB not only provided US dollar funding but also offered liquidity in Swiss francs. In response to the COVID-19 crisis, the ECB swiftly reactivated existing swap lines with several central banks and established new ones, and stood ready to provide liquidity in currencies other than US dollars and Swiss francs.

In addition, the ECB established new repo lines with several non-euro area central banks to enable these central banks to inject euro funding into their respective economies.