M-RCBG Associate Working Paper No. 181
The Geopolitics of Swap Lines
John Michael Cassetta
The U.S. Federal Reserve’s most powerful international crisis-fighting tool is its network of swap lines: dollar liquidity facilities extended to 14 foreign central banks that proved critical in meeting panicked global demand for dollars, calming international markets, and avoiding a disorderly sell-off of U.S. assets. As the only institution that can create dollar liquidity, the Fed acted as an international lender-of-last-resort in a market that uses the dollar as its key currency. But how does the Fed decide who receives swap lines? The question is important not just for crises, but for how recourse to dollar liquidity shapes the hierarchy of the international financial system. The literature to date, and the Fed’s own stated criteria, have focused primarily on economic determinants. I present an analysis of the historical record, as well as an empirical analysis of swap line selectivity, to show that closer political alignment with the U.S. and ownership of U.S. assets are associated with an increased likelihood of a country receiving a swap line in 2008 and early 2020. These findings align with the economic and geopolitical interests I propose the U.S. has at stake in enacting international lender-of-last-resort policies. The findings also have implications for U.S. policies that may affect the dominant role of the dollar in world markets (a necessary condition for many U.S. foreign and economic policy tools) in an era of increased currency competition.