Moral Hazard in Hierarchical International Agreements: Bilateral Swap Agreements, Reserve Accumulation, and the Private Sector

There are various sources of moral hazard in IPE. In this paper, I contribute by examining whether bilateral swap agreements (BSAs) cause moral hazard in central banks and the private sector. Using an original dataset on BSAs signed by all countries from 2008 to 2020 and incorporating social network analysis, I find that BSAs lead to lower reserves-to-GDP ratios in central banks on the periphery of the BSA network, while the private banking sectors behave more cautiously to make up for this increased risk. This study answers the long-debated question of whether BSAs cause moral hazard and is in line with studies that find moral hazard in the IMF and other forms of financial cooperation. Policymakers in the creditor states, the IMF, and states protected by BSAs should be aware of the adverse effects of BSAs. Additionally, I find some suggestive evidence that states on the periphery of the BSA network may be more likely to have currency crises, while less likely to have banking crises. Finally, this study highlights an important source of moral hazard in IPE, and more broadly, in international cooperation: besides asymmetric dyadic relations, states’ latent roles in the full interaction network may shape their different roles and cause moral hazard. Hierarchical structures can induce moral hazard even when interactions are symmetric.