Global Bank Lending and Exchange Rates

Jonas Becker, Maik Schmeling and Andreas Schrimpf

No 1161, BIS Working Papers from Bank for International Settlements

Abstract: We estimate the impact of banks' cross-currency lending on exchange rates to shed light on the importance of flows as a major force affecting FX market outcomes. When non-US banks extend more loans in US dollars (USD) relative to US banks originating foreign currency-denominated loans, the USD appreciates significantly. When a foreign bank grants a cross-currency USD loan, it needs to obtain USD liquidity which puts pressure on funding markets and leads to an appreciation of USD. This effect – which we estimate via a granular instrumental variable approach – has greatly intensified since the global financial crisis and crucially depends on how banks fund the provision of cross-currency loans. In line with this mechanism, we show that cross-currency lending also affects the FX swap market (and deviations from covered interest parity), as well as other segments of the US short-term funding market.

Keywords: cross-currency lending; exchange rates; granular instrumental variable; CIP deviation (search for similar items in EconPapers)
JEL-codes: E44 F31 G21 (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bis.org/publ/work1161.pdf Full PDF document (application/pdf)
https://www.bis.org/publ/work1161.htm (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1161

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().