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ECB and People's Bank of China extend currency swap arrangement

Tuesday 11 October 2022 14:13 CET | News

The European Central Bank (ECB) and the People’s Bank of China (PBC) have decided to extend their bilateral euro-renminbi currency swap arrangement for another three years until 8 October 2025.

 

As the ECB points out, the conditions of the previous arrangement remain essentially unchanged. The ECB and the PBC established the first three-year bilateral currency swap arrangement on 8 October 2013, with a maximum size of CNY 350 billion and EUR 45 billion. This was subsequently extended in 2016 and 2019, each time for a further three-year period.

From a Eurosystem perspective, the arrangement serves as a backstop facility to address potential sudden and temporary CNY liquidity shortages for euro area banks because of disruptions in the renminbi market. Liquidity-providing arrangements contribute to global financial stability. The arrangement with the PBC is consistent with the large volumes of bilateral trade and investment between the euro area and China.

More about liquidity lines

The European Central Bank does a great job of explaining what liquidity lines are and what their purpose is. These are instruments in the central banking policy toolkit, aimed at alleviating tensions in international funding markets. As the ECB explains it, they are framework agreements that enable central banks to receive currencies issued by other central banks in exchange for some form of collateral based on predefined terms. Two basic types of financial instrument can be used to establish a liquidity line: a swap agreement, like the one between ECB and PBC, and a repurchase agreement.

The European Central Bank (ECB) and the People’s Bank of China (PBC) have decided to extend their bilateral euro-renminbi currency swap arrangement for another three years until 8 October 2025.

 

Currency swap agreements between two central banks are contractual agreements in which the borrowing central bank obtains the currency of another in exchange for its own currency, which is provided as collateral. Both central banks are contracted to reverse the transaction and repay the borrowed currency plus a contractually agreed interest rate on a specified date.

As is the case with the deal with PBC, many of the ECB’s swap agreements are reciprocal. This means that the ECB can provide EUR to a central bank while receiving foreign currency as collateral, and receive foreign currency from the issuing central bank while providing euro as collateral, whichever of the two is necessary in given circumstances. However, some ECB swap agreements only envisage the ECB providing EUR to another central bank in exchange for foreign currency, issued by the requesting central bank, pledged as collateral with the ECB.

ECB recent developments

The European Central Bank recently chose paytechs Nexi and Worldline to develop a front-end prototype for making payments with digital euro. The currency is envisioned to be a fully digitized CBDC version of the EUR. Like other central bank digital currencies such as the ones piloted in China or India, the digital euro will not be replacing cash and euro banknotes, aiming to circulate in the financial system at the same time.

On another note, following recent global events, the ECB and the US Federal Reserve have joined hands to increase the interest rate, in an attempt to stamp out record inflation. The ECB didn’t predict any rate increase over the fiscal year 2022 but was facing a record inflation of 9.1%, on average in September when it took the decision.


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Keywords: partnership, central bank, digital currency, financing
Categories: Banking & Fintech
Companies: European Central Bank, People`s Bank of China
Countries: World
This article is part of category

Banking & Fintech

European Central Bank

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People`s Bank of China

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