Global Financial Safety Net and Its Layers
The global financial safety net consists of institutions and mechanisms that protect countries against financial crises, primarily arising from balance-of-payments deficits, foreign currency liquidity shortages, and public debt. This safety net is composed of four main layers:
- Countries’ international reserves,
- Bilaterial Swap Arrangements (BSA), where central banks exchange currencies,
- Regional Financial Arrangements (RFA), through which countries pool resources to support each other during crises,
- And the fourth layer, which includes the International Monetary Fund (IMF).
International Reserves: The First Line of Defense
International reserves (including foreign currency reserves, gold reserves, and Special Drawing Rights) represent the first line of defense for countries against crises. These reserves are unevenly distributed among countries, with a significant share held by advanced economies and major emerging economies.
