Global Banks’ Dollar Funding: A Source of Financial Vulnerability

Adolfo Barajas, Andrea Deghi, Claudio Raddatz, Dulani Seneviratne, Peichu Xie and Yizhi Xu

No 2020/113, IMF Working Papers from International Monetary Fund

Abstract: Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.

Keywords: WP; dollar; return on assets; USD lending; U.S. dollar; banking sector; liquidity ratio; swap line; funding cost; Commercial banks; Currencies; Liquidity management; Liquidity requirements; International reserves; Global; US dollar funding; financial stability risks; cross-currency basis; global banks; international liquidity; home economy; USD funding; USD assets; vulnerability indicator; USD liquidity ratio; asset share; x CCFR; assets ratio (search for similar items in EconPapers)
Pages: 50
Date: 2020-07-03
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-ifn and nep-mon
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