From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers

BIS Working Papers No 285
July 2009

Published in: Journal of International Money and Finance, vol 28, no 8, December 2009, pp 1350-74.


This paper investigates dislocations in the foreign exchange (FX) swap market between the US dollar and three major European currencies. After the failure of Lehman Brothers in September 2008, deviations from covered interest parity (CIP) were negatively associated with the creditworthiness of US financial institutions (as well as that of European institutions), consistent with the deepening of a dollar liquidity problem into a global phenomenon. US dollar term funding auctions by the ECB, SNB, and BoE, as well as the US Federal Reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the FX swap market dislocations.

JEL Classification Numbers: F31, G15

Keywords: FX swap, covered interest parity, financial market turmoil, counterparty risk, US dollar swap lines, term auction facility, central bank cooperation, Lehman bankruptcy