Banks’ Dollar Funding: A source of Financial Vulnerability

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Abstract

In the run-up to the global financial crisis, lending in US dollars by global banks headquartered outside the United States (global non-US banks), together with their reliance on short-term and volatile wholesale funding, became crucial transmission mechanisms for shocks that originated in the major funding markets for US dollars. Whereas regulation following the crisis has improved the resilience of banking sectors in many dimensions, these mechanisms remain a source of vulnerability for the global financial system. This chapter constructs three measures to gauge the degree of US dollar funding fragility of global non-US banks and describes their evolution in recent years. Empirical results show that an increase in US dollar funding costs leads to financial stress in the economies that are home to global non-US banks and to spillovers through a cutback in loans to recipient economies, those that borrow US dollars. US dollar funding fragility and the share of US dollar assets to total assets amplify these negative effects. However, some policy-related factors can mitigate them, such as swap line arrangements between central banks and international reserve holdings by home economy central banks. Furthermore, this chapter finds that emerging markets that are recipient economies are particularly susceptible to declines in US dollar cross-border lending because they have limited ability to turn to other sources of US dollar borrowing or to replace dollars with other currencies. These results highlight the importance of controlling vulnerabilities arising from the US dollar funding of non-US banks. The US dollar funding fragility measures constructed in this chapter can help improve their monitoring.

Publication
In IMF Global Financial Stabiliy Report

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Jannic Alexander Cutura
Jannic Alexander Cutura
Software ∪ Data Engineer

My interests include distributed computing and cloud as well as financial stability and regulation.