Central Bank Currency Swap

  1. Financial Stability
  2. FX & Int'l Relations
  3. International Relations
  4. Central Bank Currency Swap

Central Bank Currency Swaps

Central bank currency swaps are currency swaps concluded between central banks as a means to secure foreign exchange liquidity for various purposes. Generally, currency swaps involve the exchange of different currencies between counterparties in the financial market and an agreement to re-exchange the principal at a later date, serving as a tool for financial institutions to obtain medium- to long-term foreign currency funding and hedge against exchange rate risks. Central bank currency swaps are similar to typical currency swaps in that they involve a exchange of two currencies. The difference between them lies in that the former are used by central banks to supply foreign currency liquidity to their country‘s financial institutions.

Central bank currency swaps offer an advantage in terms of speed and cost among various means of securing foreign currency liquidity by central banks. Central bank currency swaps enable swift responses through standing communication channels between central banks. Moreover, unlike foreign exchange reserves, no ongoing management costs are incurred. For these reasons, the network of central bank currency swaps is expanding globally, with the scope of their uses becoming more diverse.

Purpose of the Bank of Korea’s Currency Swap Arrangements

Bank of Korea enters into currency swap arrangements with major countries for various purposes such as financial and foreign exchange market stability, trade support, and promotion of financial cooperation.

①  Financial and Foreign Exchange Market Stabiltiy

Bank of Korea can provide foreign currency liquidity to stabilize markets in the event of a credit crunch in the foreign currency market posing funding difficulty to financial institutions. In such cases, the Bank can support domestic financial institutions by directly obtaining foreign currency liquidity from counterparty central banks through central bank currency swaps without depleting its foreign exchange reserves. The Bank did provide U.S. dollar liquidity to domestic financial institutions through its currency swap with the U.S. Federal Reserve during the Global Financial Crisis in 2008 and the COVID-19 pandemic in 2020. Additionally, the announcement of currency swap arrangements with major central banks stabilize the foreign exchange market through the announcement effect, even if they are not actually used. Announcements of the Bank of Korea’s signing of currency swap arrangements with major central banks have contributed to stabilizing the foreign exchange market and improving credit risk indicators in the past. Furthermore, central bank currency swaps can have a positive effect on the sovereign credit rating by enhancing its external debt repayment capacity through the provision of foreign currency liquidity in case of crisis.

②  Trade Support

Bank of Korea provides a borrowing channel for financial institutions to securely obtain the currency of major trading partner countries through central bank currency swap arrangements. In this case, trade transactions can be conducted using the currency of the trading partner country without relying on a reserve currency such as the US dollar. For example, the Bank supports the settlement in local currencies of bilateral trade through the currency swap arrangement with the People’s Bank of China. This can have a positive impact on enhancing the international status of the Korean won, which is a non-reserve currency, by increasing the utilization of cross-border transactions in the medium- to long-term.

③  Promotion of Financial Cooperation

The establishment of central bank currency swap arrangements strengthens the financial cooperation between the two countries, providing a foundation for increased mutual financial transactions. Indeed, following the signing of the currency swap arrangement with the Swiss National Bank in 2018, there was a significant increase in the issuance of Korean financial institutions' and companies' bonds denominated in Swiss francs as the investment sentiment of Swiss financial institutions towards South Korea improved.

Current Status of the Bank of Korea’s Currency Swap Arrangements

Bank of Korea has actively pursued currency swap arrangements with major central banks to enhance financial safety nets and other initiatives. Korea also participates in the Chiang Mai Initiative Multilateralization (CMIM), a multilateral currency swap arrangement that promotes stability in regional financial markets by preventing liquidity crises and supporting ex-post resolution in the ASEAN+3 economies.

Thanks to these efforts, as of the end of 2022, the Bank has currency swap arrangements totaling approximately $138.2 billion (excluding Canada, which does not have a pre-set limit) in value.

Current Status of the BOK’s Currency Swap Arrangements
(as of the end 2022)


Bilateral

Multilateral


Canada

(KRW
CAD)

China

(KRW
CNY)

Switzerland

(KRW

CHF)

Indonesia

(KRW
IDR)

Australia

(KRW
AUD)

UAE

(KRW
AED)

Malaysia

(KRW

MYR)

Türkiye

(KRW
TRY)

CMIM

Total principal amount

(+α)1)

70 trillion KRW

400 billion CNY

11.2 trillion KRW

10 billion

CHF

10.7 trillion KRW

115 trillion IDR

9.6 trillion KRW

12 billion AUD

6.1 trillion KRW

20 billion AED

5 trillion KRW

15 billion

MYR

2.3 trillion KRW

17.5 billion TRY

38.4 billion USD

(59 billion USD)

(10.6 billion USD)

(10 billion USD)

(8.1 billion USD)

(5.4 billion USD)

(4.7 billion USD)

(2 billion USD)

Arranged (extended) in

Nov. 2017

Oct.

2020

 Mar. 

2021

Mar.

2020

Feb.

2020

Apr.

2022

Feb.

2020

Aug.

2021

Jul.

2014


  1. Note : 1)Without pre-set total principal amount
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