Bilateral Local Currency Swap Agreement

In particular, the agreement will ensure the management of local currency exchanges between the two countries, even in times of financial burden, and thus support regional financial stability. The duration of the facility is three years, i.e. from March 6, 2020 to March 5, 2023, renewable by mutual agreement between the parties. In the event of a full exchange of capital when the agreement is put in place, the exchange is cancelled on the due date. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of exchange. Interest rates can be fixed or variable. The agreement was recently signed by BoK Governor Juyeol Lee and IB Governor Perry Warjiyo. Like the previous agreement, BCSA aims to promote bilateral trade and financial cooperation for the economic development of both countries. In October 2008, Timothy Geithner, then president of the New York Fed, noted that Europe had „a banking system that could become very, very large relative to GDP, with huge monetary asymmetries and no plans to cover the liquidity needs of their banks in dollars if we are faced with such a storm.“ While swap lines prevented the sale of assets and other measures that would have aggravated the crisis, the fact that swap lines now appear permanent could effectively stimulate the growth of these „enormous monetary asymmetries“. Banks will now expect their central banks to provide them with foreign currency if market difficulties make it more difficult to obtain this financing on private markets, and those lending to foreign banks will continue to do so in the hope that they will be repaid in times of crisis with funds borrowed by the Central Bank. The existence of swaps therefore makes the banks` dependence on short-term financing even more important and the requirement that foreign banks hold high-quality, liquid local money assets. Since 2007, central banks in industrialized countries have also offered swap lines for a limited number of emerging countries.

Because of the risks associated with swap lines, the Fed has been much more cautious to extend them to emerging economies than with other developed economies. The Fed has insisted on provisions allowing it to seize its assets from the New York Fed in the event of non-repayment. Today, the Reserve Bank of Australia renewed the bilateral swap agreement with the Bank of Korea. The initial swap contract between the two central banks was signed in 2014 and has been extended for three years since then. The new agreement is for three years and may be renewed in the future by mutual agreement between the two parties. The new agreement allows the exchange of local currencies between the two central banks up to AUD 12 billion, or 9.6 trillion KRW. Since the 2007 financial crisis, central banks around the world have concluded a large number of bilateral currency exchange agreements with each other. These agreements allow a central bank of a country, the currency, usually its national currency, to exchange for a certain amount of foreign currency. The recipient central bank can then lend this currency on its own terms and risks to its national banks.