European banks primarily have funding in euros and can usually borrow dollars they need from another bank. In a crisis, banks tend to hoard their dollars and are too fearful to loan them to each other. With the dollar swap lines, the Federal Reserve swaps dollars for euros from the European Central Bank, which lends dollars to troubled European banks. Read related article.

Source: Staff reports | Neil Irwin and Tobey/The Washington Post November 30, 2011
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