Mar.HFS Subcommittee Examines Federal Reserve Aid to the Eurozone
At a House Financial Services Subcommittee hearing on March 27, Republican lawmakers pressed Federal Reserve officials on the use of swap lines with the European Central Bank (ECB) and other central banks.
Subcommittee Chairman Ron Paul (R-Texas) said “the crisis we face right now is a crisis in debt.” Adding, “[l]iquidating debt by diminishing real debt, by purposely devaluing the currency … is one of the most common ways of liquidating debt” and there “seems to be a concerted effort around the world … to handle debt in that fashion.”
In his opening statement, Ranking Member Lacy Clay (D-M.O.) listed concerns about the Eurozone crisis including: high levels of public debt in some countries, low growth and high unemployment rates, the weakness of EU’s banking system, and persistent trade imbalances within the Eurozone.
In his opening statement, William Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said there have been three recent encouraging developments in Europe: 1) liquidity concerns have eased; 2) Greek government agreement with private bond holders and resulting restructuring; and 3) EU Treaty which will lead to greater fiscal coordination and long-term fiscal stability.
However, if the EU fails to chart an effective course to emerge from the crisis, Dudley said the demand for U.S. exports would decrease and further deterioration in the EU economy will put pressure on the U.S. banking system and financial markets in general, which could impair the flow of credit.
Dudley added the Federal Reserve has a “strong interest” in ensuring EU banks with U.S. operations remain active in the U.S. marketplace and continue to provide credit to U.S. households and businesses by engaging in currency swaps, which will create a “credible backstop” to support private credit markets. These swap lines, according to Dudley, have allowed EU banks to avoid liquidity pressures and have reduced the risk of an abrupt sale of U.S. assets.
In his opening statement, Steven Kamin, Director of the Division of International Finance, Board of Governors of the Federal Reserve System, said while market pressures have eased in Europe, “these markets remain under strain.” Kamin added that the Federal Reserve swap lines “are safe and secure” as there is no exchange rate or interest rate risk, the Federal reserve must approve of each drawing on the swap lines, the foreign currency held by the Federal Reserve during the term of the swap drawings provides added security, and the counterparties in the swap agreements are foreign central banks, not private institutions, which the Federal Reserve “has had a long and close relationship with” and which assume the credit risk associated with the lending. Kamin noted that the fees received from the swap lines have added to the earnings the Federal Reserve remits to the taxpayers.
Kamin described how the draws on swap lines “increased considerably” after the Federal Reserve announced changes in November, but have fallen back in recent weeks due to improved market conditions.
Question & Answer
A number of lawmakers pressed Dudley, in particular, about the Federal Reserve’s use of swap lines, a general description of them, the history and track record behind such use, and how swap lines benefit the American economy.
Dudley and Kamin strongly defended the Federal Reserve’s use of swap lines to the ECB and other central banks. Both officials reiterated throughout the hearing that swap lines are a benefit to U.S. households and businesses as it provides EU banks with U.S. operations the means to continue providing credit. Dudley and Kamin added that the use of swap lines helps alleviate liquidity pressures and concerns that foreign institutions could wind down their U.S. assets in a disorderly manner.
Both officials also stressed the need for European leaders and officials to follow through on recent fiscal commitments and that improved fiscal performance must be buttressed by improved growth.
Paul asked where the Federal Reserve draws the line when it comes to making promises “that [the U.S.] can always be available,” adding “what is the limiting factor to the U.S. dollar and U.S economy bailing out the world?”
Dudley said Federal Reserve decisions are based on “what is in our self interest as a country and what’s best for U.S. households and businesses.” If intervention can help U.S. households and businesses, Dudley said, “then we want to proceed.” If such a calculation is not reached, “then we don’t want to undertake it,” said Dudley. “We’ll do interventions that are consistent with our dual mandate set by Congress.”
Kamin added that the Federal Reserve purpose in the swap line “is not to make whole all the debts that have been accumulated around the world.” The key strategy “is to make sure that foreign banks can maintain the flow of credit to both U.S. households and firms and those around the world that in turn buy U.S. goods and services.”
In response to a comment from Dudley that U.S. households are continuing to deleverage, Paul asked about the amount of mortgage debt held on the Federal Reserve’s books. While noting “that we don’t really know what the real value is,” Paul asked, “has there been any real liquidation of debt when it comes to mortgages and derivatives” as it “seems like none of that has been deleveraged, if anything … it looks like it’s getting worse.”
On mortgage issues, Dudley said there’s been some deleveraging as banks have taken losses and there have been principle reductions. He noted that total household debt outstanding according to the flow of funds measure “was roughly flat last year … so you’re actually seeing the debt burden becoming less overwhelming.”
For more on today’s hearing, please click here.
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At a House Financial Services Subcommittee hearing on March 27, Republican lawmakers pressed Federal Reserve officials on the use of swap lines with the European Central Bank (ECB) and other central banks.
Subcommittee Chairman Ron Paul (R-Texas) said “the crisis we face right now is a crisis in debt.” Adding, “[l]iquidating debt by diminishing real debt, by purposely devaluing the currency … is one of the most common ways of liquidating debt” and there “seems to be a concerted effort around the world … to handle debt in that fashion.”
In his opening statement, Ranking Member Lacy Clay (D-M.O.) listed concerns about the Eurozone crisis including: high levels of public debt in some countries, low growth and high unemployment rates, the weakness of EU’s banking system, and persistent trade imbalances within the Eurozone.
In his opening statement, William Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said there have been three recent encouraging developments in Europe: 1) liquidity concerns have eased; 2) Greek government agreement with private bond holders and resulting restructuring; and 3) EU Treaty which will lead to greater fiscal coordination and long-term fiscal stability.
However, if the EU fails to chart an effective course to emerge from the crisis, Dudley said the demand for U.S. exports would decrease and further deterioration in the EU economy will put pressure on the U.S. banking system and financial markets in general, which could impair the flow of credit.
Dudley added the Federal Reserve has a “strong interest” in ensuring EU banks with U.S. operations remain active in the U.S. marketplace and continue to provide credit to U.S. households and businesses by engaging in currency swaps, which will create a “credible backstop” to support private credit markets. These swap lines, according to Dudley, have allowed EU banks to avoid liquidity pressures and have reduced the risk of an abrupt sale of U.S. assets.
In his opening statement, Steven Kamin, Director of the Division of International Finance, Board of Governors of the Federal Reserve System, said while market pressures have eased in Europe, “these markets remain under strain.” Kamin added that the Federal Reserve swap lines “are safe and secure” as there is no exchange rate or interest rate risk, the Federal reserve must approve of each drawing on the swap lines, the foreign currency held by the Federal Reserve during the term of the swap drawings provides added security, and the counterparties in the swap agreements are foreign central banks, not private institutions, which the Federal Reserve “has had a long and close relationship with” and which assume the credit risk associated with the lending. Kamin noted that the fees received from the swap lines have added to the earnings the Federal Reserve remits to the taxpayers.
Kamin described how the draws on swap lines “increased considerably” after the Federal Reserve announced changes in November, but have fallen back in recent weeks due to improved market conditions.
Question & Answer
A number of lawmakers pressed Dudley, in particular, about the Federal Reserve’s use of swap lines, a general description of them, the history and track record behind such use, and how swap lines benefit the American economy.
Dudley and Kamin strongly defended the Federal Reserve’s use of swap lines to the ECB and other central banks. Both officials reiterated throughout the hearing that swap lines are a benefit to U.S. households and businesses as it provides EU banks with U.S. operations the means to continue providing credit. Dudley and Kamin added that the use of swap lines helps alleviate liquidity pressures and concerns that foreign institutions could wind down their U.S. assets in a disorderly manner.
Both officials also stressed the need for European leaders and officials to follow through on recent fiscal commitments and that improved fiscal performance must be buttressed by improved growth.
Paul asked where the Federal Reserve draws the line when it comes to making promises “that [the U.S.] can always be available,” adding “what is the limiting factor to the U.S. dollar and U.S economy bailing out the world?”
Dudley said Federal Reserve decisions are based on “what is in our self interest as a country and what’s best for U.S. households and businesses.” If intervention can help U.S. households and businesses, Dudley said, “then we want to proceed.” If such a calculation is not reached, “then we don’t want to undertake it,” said Dudley. “We’ll do interventions that are consistent with our dual mandate set by Congress.”
Kamin added that the Federal Reserve purpose in the swap line “is not to make whole all the debts that have been accumulated around the world.” The key strategy “is to make sure that foreign banks can maintain the flow of credit to both U.S. households and firms and those around the world that in turn buy U.S. goods and services.”
In response to a comment from Dudley that U.S. households are continuing to deleverage, Paul asked about the amount of mortgage debt held on the Federal Reserve’s books. While noting “that we don’t really know what the real value is,” Paul asked, “has there been any real liquidation of debt when it comes to mortgages and derivatives” as it “seems like none of that has been deleveraged, if anything … it looks like it’s getting worse.”
On mortgage issues, Dudley said there’s been some deleveraging as banks have taken losses and there have been principle reductions. He noted that total household debt outstanding according to the flow of funds measure “was roughly flat last year … so you’re actually seeing the debt burden becoming less overwhelming.”
For more on today’s hearing, please click here.