The hierarchy of the offshore US-Dollar system. On swap lines, the FIMA Repo Facility and special drawing rights

Abstract

While it has become common to regard the international monetary system as hierarchical, the nature, shape and origin of this hierarchy often remain vague. Taking on board insights of critical macro-finance, this study from the Global Economic Governance Initiative at the Global Development Policy Center conceptualizes international monetary hierarchy by focusing on different mechanisms to supply emergency US-Dollar (USD) liquidity from the Federal Reserve (Fed) to non-US central banks and develops a model of the global financial architecture as a web of hierarchical interlocking balance sheets. The model perceives today’s international monetary system as an ‘Offshore USD System,’ as it is based on using and creating USD-denominated credit money instruments ‘offshore’, i.e. outside the US. The centrality of the USD as global ‘key currency’ places the US monetary jurisdiction at the apex and pushes all other monetary jurisdictions into a peripheral position. While private credit money creation is the default mechanism in normal times, central banks become paramount when private credit money instruments are about to endogenously implode in a crisis. The mechanisms through which non-US central banks can access emergency USD liquidity from the Fed determine the international hierarchy below the apex. Currently, there are three different mechanisms for non-US central banks to access the Fed’s balance sheet to attain emergency USD liquidity: the Fed’s central bank swap lines, the Fed’s new repo facility for Foreign and International Monetary Authorities (FIMA), and the Special Drawing Rights (SDR) system administered by the International Monetary Fund. These mechanisms create three peripheral layers in the Offshore USD System. Not only do they matter when they are actually used in systemic crises, but also during normal times. Peripheral monetary jurisdictions that are higher up in the international hierarchy receive a more flexible and inexpensive implicit liquidity guarantee that increases their banking systems’ elasticity space.