Figure 1 illustrates the basic structures of swap and pension liquidity arrangements, such as the ECB. From the perspective of the borrowing central bank, swap arrangements are more attractive than repo lines for at least two reasons: first, they allow access to a currency issued by another central bank without having to provide collateral in that currency. Second, swap line pricing is generally more advantageous than pension arrangements. In times of heightened financial market stress, such as the COVID-19 pandemic or the global financial crisis, foreign currency refinancing conditions can deteriorate rapidly due to increased risk aversion. As a result, it can be difficult for market participants to obtain sufficient liquidity in foreign currency to meet their payment obligations. Figure 5 shows that a significant part of the monetary reserves of non-euro area central banks are denominated in euro, including sovereign bonds issued by euro area countries. This reflects the important role of the euro in global financial transactions. There are two types of swap lines: the dollar exchange line and the currency exchange line. In the dollar exchange line, the Fed provides dollars to a foreign central bank. Just prior to the COVID-19 pandemic, the U.S. Central Bank had US-dollar liquidity swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. On 20 March 27, 2020, it extended this agreement to nine additional central banks, each comprising $60 billion with the Monetary Authority of Singapore, the Reserve Bank of Australia, Banco Central do Brasil, danmarks Nationalbank, the Bank of Korea and the Banco de Mexico, as well as $30 billion with the Reserve Bank of New Zealand, Norges Bank and Sveriges Riksbank. to reduce U.S.
global U.S. dollar financing markets due to the pandemic and mitigate their impact on the supply of credit to households and businesses around the world.  On March 31, 27, 2020, a new program allowed these banks to use their holdings of U.S. Treasury bonds overnight as collateral for U.S. dollar loans to ”support the smooth functioning of the U.S. treasury market by providing an alternative temporary source of U.S. dollars, with the exception of the sale of securities on the open market”.  A deterioration in U.S. dollar financing conditions can create difficulties for non-U.S. commercial banks or companies to meet their U.S. dollar payment obligations. The ability to obtain U.S.
dollar funds from the Federal Reserve through its own central bank acts as a liquidity backstop and prevents an excessive tightening of the credit supply. In this way, it ensures that the real economy is protected against tight conditions in the us dollar refinancing markets and avoids possible waves of instability from the domestic to the international market. Table 1: Liquidity swap arrangements of the Federal Reserve in US dollars With the establishment of formal liquidity agreements between the Eurosystem and non-euro area central banks, this market disruption becomes the source of the cause. Note that even small reserve holders can affect market conditions for some euro area government bonds in times of low market liquidity. . . .