BOFIT Seminar - Yang Jiao (Singapore Management University) - Central Bank Swap Lines, Bank Risk Management and Currency

Co-authors: Ohyun Kwon (Drexel University), Saiah Lee (Ulsan National Institute of Science and Technology) and Shang-Jin Wei (Columbia University)

This paper investigates the role of central-bank local currency swap lines in promoting the use of local currencies in trade invoicing. We emphasize the role of swap lines in banks' currency risk management. Using exporter-trading partner-year level data on currency invoicing from South Korea during 2006-2019, we show that signing swap lines between Korea and China likely played a role in the rise of the RMB in the invoicing share among Korean exporters. We exploit the firm-level heterogeneity in our analysis by showing that Korean exporting firms whose main banks had more ex-ante exposure to China exhibited greater increase in RMB invoicing. Our theory suggests that the financial safety net provided by the swap line incentivizes banks to provide higher interest rates for deposits in the partner's currency, and hence promotes the use of the same currency in trade invoicing.

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