The Fed Lends the World Dollars. Five Central Banks Never Have to Ask.

Every few years the dollar goes missing, and never from America. Banks outside the United States hold trillions of dollars of American assets funded by short-term dollar borrowing they roll over more or less continuously, and when the lenders stop rolling, those banks need dollars they cannot create. Their own central banks cannot create them either. So they sell what they own, which is overwhelmingly American paper, and the selling lands in New York as a falling market in Treasuries and credit. The Federal Reserve's answer, built over sixty years and made permanent for exactly five institutions, is to lend dollars straight to other central banks and let them do the distributing. It gets filed under international cooperation. Read the balance sheet and it looks a lot more like self-defence.

1. The Fed lends $36.3 billion and takes no credit risk

The mechanics are almost disappointingly plain. The ECB sells euros to the Fed at the market exchange rate and receives dollars, which are credited to an account it keeps at the Federal Reserve Bank of New York. At the same moment both sides sign a binding agreement to reverse the trade on a fixed future date at the same exchange rate, so the Fed's euro asset cannot move in value between the two legs no matter what the currency does. The ECB then lends the dollars to European banks against whatever collateral it demands, and pays the Fed interest when the swap unwinds.

The part worth sitting with is who carries the risk. If a European bank fails owing dollars, the ECB eats the loss. The Fed is not a counterparty to that loan and never learns much about it. It has lent to a central bank, which is the one category of borrower that cannot run out of its own currency, and it holds that currency in the meantime. The price is the US overnight index swap rate plus a spread, cut to 25 basis points in March 2020 and left there, deliberately set above what dollar funding costs in calm markets. Maturities run from overnight to three months. The facility is designed to be slightly too expensive to use until the day it is the only thing available.

2. In December 2008 a quarter of the Fed's balance sheet sat abroad

It started small and it started for America's benefit. In the 1960s, with the dollar convertible to gold at a fixed price and foreign dollar claims growing faster than the US gold stock, the Fed built a web of reciprocal currency arrangements with nine large economies to head off a run on the dollar itself. Drawings across the whole of 1962 to 1969 came to about $7 billion. Nobody described that as generosity to foreigners, because it plainly was not.

The modern version arrived in December 2007: $20 billion for the ECB, $4 billion for the Swiss National Bank. After Lehman collapsed the Fed added twelve more central banks, and by late October 2008 it had told the ECB, the SNB, the Bank of England and the Bank of Japan that the amount was unlimited. Outstanding swaps peaked above $580 billion in December 2008, roughly a quarter of everything the Federal Reserve owned. The lines were shut in February 2010 and reopened three months later when the euro crisis made dollar funding scarce again. In March 2020 the Fed cut the spread, reopened temporary lines with nine central banks that had been dropped after the crisis, and watched drawings reach about $470 billion by May, some 80% of it going to Frankfurt and Tokyo.

Notice what the Fed bought for that. In both episodes the alternative to lending dollars abroad was foreign institutions liquidating American assets into a market with no bid, at exactly the moment the Fed was trying to hold that market together. Lending a quarter of your balance sheet to solvent central banks, secured by their currency, at a penalty rate, to stop a fire sale in your own government's debt is not charity. It is the cheapest trade available.

3. October 2013 gave five central banks a line that never expires

On the last day of October 2013 the Fed converted the temporary arrangements with the Bank of Canada, the Bank of England, the ECB, the Bank of Japan and the Swiss National Bank into standing ones, in place until further notice, in any of the six currencies. That sentence created a tier of the world financial system. Those five can pick up the phone. They do not negotiate, they do not apply, and nobody has to decide whether they deserve it.

Below them sits a second tier that exists only when Washington says so. Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, Singapore and Sweden held lines in 2008 and got them back in March 2020, then lost them again when the emergency passed. Below that is everyone else, roughly speaking most of the world's population, whose backstop is the International Monetary Fund's Flexible Credit Line, Short-Term Liquidity Line and Precautionary and Liquidity Line. Take-up of those has always been thin, and the reason is not the interest rate. Drawing on a Fed swap line says you are inside the system. Filing with the IMF says you are in trouble, and every investor in your currency reads the filing.

"A swap line is not really a lending facility. It is a statement about which central banks Washington considers part of its own financial system, and it can be revised."

The Fed did build a door for everybody else. The FIMA repo facility, opened in March 2020 and made standing in July 2021, lets any central bank with an account at the New York Fed pledge its Treasuries for cash rather than dump them on the market. Sensible design, and almost nobody has used it: peak drawings of about $1.4 billion in May 2020, against $470 billion on the swap lines the same month. A facility and a relationship are not the same instrument, and reserve managers can tell the difference.

4. Europe starts costing out a pot of dollars it controls

For fifteen years the arrangement held because nobody seriously imagined the window closing. That assumption has been under quiet review since March 2025, when Reuters reported European central banking and supervisory officials asking each other whether they could still count on the Fed for dollars under the current administration, while conceding it was very unlikely the Fed would refuse. Jerome Powell said in July 2025 that the swap lines remained an important tool and that the Fed stood ready. He is no longer the person who answers the phone. By November officials were reported to be discussing something more concrete: pooling hundreds of billions of euros' worth of reserves held by euro zone and allied central banks into a common pot of dollars they would control themselves, an idea Robert McCauley had sketched publicly that May as a coalition of fourteen central banks lending to each other.

Work through the mechanics and the escape route doubles back on itself. Those pooled reserves are not sitting in vaults as banknotes. They are invested in US Treasuries, so mobilising the pot in a crisis means selling Treasuries at scale into a stressed market, which drives American yields up and drags the Fed in as the buyer of last resort anyway. Self-insurance against the Fed turns out to require the Fed. This publication watched the same loop close in August, when Washington sold euros rather than dollars to help Tokyo defend the yen, precisely so Japan would not have to liquidate the largest foreign pile of Treasuries in existence. The swap lines are that same trade with the paperwork done in advance. What is a pool worth if drawing on it damages the asset the pool is made of?

The takeaway

When the Fed is described as having "supported" foreign central banks, invert the sentence and it explains more. Dollar dominance means the world's banking system runs on a currency only one institution can produce, and that institution has to keep supplying it in a panic or watch the panic arrive at home. The swap lines are the pipe that makes the arrangement survivable, and they were built by Americans to protect Americans. What has changed is not the plumbing. It is that the people on the other end have started asking who decides, and have noticed that the answer is a small number of people in Washington who never had to put it to a vote. The interesting question is not whether the Fed would refuse. It is what the world does with the knowledge that it could.