Interbank Markets and Central Bank Intervention during the COVID-19 Crisis

COVID-19 evolved to become the first major global crisis since the sub-prime and the euro sovereign debt crisis. Banks' funding planning was exposed to constraints and risks, especially in their major foreign currencies. Using two-way quotes for foreign exchange swaps, we find that when the crisis evolves, banks actively increase swap maturities while being confronted with increased swap spreads. Not surprisingly, this development reflects increasing uncertainty in the market. Contrary to common intuition, however, we find that after the coordinated central bank intervention in March 2020 banks only marginally reduce swap durations, while spreads continue to climb further. Our results suggest that the interventions did not yield the desired effect and uncertainty in the market remained.