Good points. Every layer of the onion begets another.

Apart from any disadvantages of foreign banks selling US reserve assets and the considerations you point out, the Fed mechanism was quick, systematic, and relatively smooth – attractive in the circumstances that precipitated the requirement for dollars.

As to why dollar assets that might have been available as collateral weren’t used as collateral, your guess is as good as mine. That said, foreign central banks in drawing on Fed lines before using their own reserves would retain additional firing power for any further dollar contingencies (whatever that might mean) in what was a truly frightening systemic breakdown.

But I agree that had dollar assets been used as collateral, they would have been superior to central bank deposits in foreign currency.

Sorry if I misled you about what I was trying to say; hopefully we now concur about the swaps. It is the fact that the foreign central bank lends out its dollars while the Fed does not lend its foreign currency that creates a net official capital flow.

As to why the central banks with large dollar reserves are not selling dollar securities or even using them as collateral when borrowing dollars from the Fed, it raises some interesting questions. Countries like Japan are not actively using their holdings of treasuries for other purposes at the moment. Presumably the US would not welcome foreign central banks selling treasuries right now, but I would have thought that the Fed would have appreciated the better security provided by taking treasuries as collateral – ie a dollar asset in the Fed’s own custody. Perhaps the foreign central banks wish to avoid giving any impression that the present crisis requires them to run down or even encumber their reserves, but if they will not use their reserves at times like this, in what circumstances would they use them? Questions that are more for Brad perhaps.

It’s a difficult subject to communicate, given the delicacy of the terminology and the various moving pieces.

Writing this out was a good exercise in any case. In doing so, I was responding to what I interpreted was your earlier point, that accounting for the central banks should be the same. In fact it’s different because the two central banks end up with different positions with respect to each other.

The other point was that foreign central banks wouldn’t be coming to the Fed unless they needed dollars. Otherwise they would sell dollar assets. Pledging collateral in dollars therefore doesn’t make much sense, given their net demand for dollars. Domestic currency seems the most natural alternative for such collateral. The only question remaining is whether the Fed is better off with un-uncollateralized dollar loan or a collateralized dollar swap.