Swap Network


DEFINITION of 'Swap Network'

A worldwide network of central banks that establish a reciprocal credit line relationship to temporarily swap currencies. The purpose of the swap is to give each bank the ability to simultaneously exchange a fixed amount of one another's currencies to both stabilize its own currency and improve liquidity conditions. While many repayment periods on swap lines are typically three months, debt holders can rollover their outstanding loans to extend the repayment terms.

Also known as a currency swap line or temporary reciprocal currency arrangement.

BREAKING DOWN 'Swap Network'

When a central bank swaps currencies it has the ability to then auction off those foreign currencies in overnight funds to private banks. The auction will then increase the supply of that foreign currency in that country and help lower the interest rate that banks charge (LIBOR) when lending to one another. This is an important benefit when liquidity is otherwise strained; the swap network can help increase banks and businesses' access to more-affordable financing often required to meet operating expenses.

Swap network arrangements were used extensively between countries worldwide during the 2008 international credit crisis to help ease liquidity restrictions in the foreign exchange market.

  1. Overnight Rate

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  2. Reciprocal Currency Arrangement

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  3. Sovereign Risk

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