We analyse dislocations in the foreign exchange swap and cross‐currency swap markets between Korean won and US dollar from 2007 to 2009. A regime‐switching analysis of deviations from covered interest parity (CIP) identifies a crisis period starting in June 2007. Using an EGARCH model, we find that volatility index and the credit default swap spreads of Korean and US banks are the main factors explaining CIP deviations. We show that the Bank of Korea's US dollar loans of the proceeds of swaps with the US Federal Reserve were effective in reducing CIP deviations, whereas the provision of funds using its foreign reserves was not. Copyright © 2014 John Wiley & Sons, Ltd.