Central Banking’s New Club Class

NEW YORK – In the wake of the 2007-2008 financial crisis, the world’s central banks played a critical role in rescuing the global financial system. They stepped in when private markets froze, acting as lenders and dealers of last resort, and provided additional liquidity to grease the wheels of finance.

These central banks offered their services primarily to domestic actors, but they also extended their largess to foreign private entities. Indeed, even foreign states benefited after central banks entered into swap agreements, giving one another unlimited access to their respective currencies. This has created a worrying precedent.

Originally created as a temporary fix in 2007, the swap lines established at that time connecting the US Federal Reserve, the European Central Bank, and the Swiss National Bank have been extended each time a new crisis has unsettled the markets. More recently, however, six central banks announced that they had made their swap lines permanent.

But did these central banks have the legal authority to do so? And, even if they did, should they have used it?