Central bank swaps and foreign reserves: From the perspective of a global network

Abstract

Central bank swaps have flourished since the 2008 financial crisis and the intertwining swap lines have formed a typically complex network, in which bilateral swap relationships have been deeply embedded. This paper constructs a global swap network of central banks and then utilises network indices to measure the network positions and resources of swap central banks. From the perspective of the global swap network, it employs the Spatial Durbin Model to empirically estimate both direct and indirect effects of swap positions on foreign reserves and then further explores the applicability of these effects. The findings confirm a negative impact of network positions on foreign reserves. Besides, swaps can significantly substitute for foreign reserves of relevant banks by back-up rescue and demonstration mechanisms. The fact that spatial spill-over effects are much larger than direct effects justifies the necessity to assess swap performance from a spatial perspective. Applicability tests show that the substitution effect is larger in less developed countries and those with lower foreign exchange stability and financial openness. The conclusions have important policy implications for the construction of a global financial safety net and the coordination of counter-measures to cope with crises.