From Turmoil to Crisis: Dislocations in the FX Swap Market Before and After the Failure of Lehman Brothers

40 Pages Posted: 20 Aug 2009  

Naohiko Baba

affiliation not provided to SSRN

Frank Packer

Bank for International Settlements (BIS)

Date Written: August 20, 2009

Abstract

This paper investigates dislocations in the foreign exchange (FX) swap market between the US dollar and three major European currencies. After the failure of Lehman Brothers in September 2008, deviations from covered interest parity (CIP) were negatively associated with the creditworthiness of US financial institutions (as well as that of European institutions), consistent with the deepening of a dollar liquidity problem into a global phenomenon. US dollar term funding auctions by the ECB, SNB, and BoE, as well as the US Federal Reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the FX swap market dislocations.

Keywords: FX swap, covered interest parity, financial market turmoil, counterparty risk, US dollar swap lines, term auction facility, central bank cooperation, Lehman bankruptcy

JEL Classification: F31, G15

Suggested Citation

Baba, Naohiko and Packer , Frank, From Turmoil to Crisis: Dislocations in the FX Swap Market Before and After the Failure of Lehman Brothers (August 20, 2009). BIS Working Paper No. 285. Available at SSRN: https://ssrn.com/abstract=1458296 or http://dx.doi.org/10.2139/ssrn.1458296

Naohiko Baba (Contact Author)

affiliation not provided to SSRN

Frank Packer

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland
4161 280 8449 (Phone)

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