The advent of the financial crisis in August 2007, and its subsequent intensification, has largely eroded the hitherto apparently sharp distinction between monetary and financial stability, and it has led to a revival of central bank co-operation. The purpose of this paper is to describe and explain how things have changed, focussing on the main innovation in central bank cooperation during this crisis, namely the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency- specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the the role and effectiveness of swap lines in relieving currency- specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures.
