Granular Banking Flows and Exchange-Rate Dynamics

Balduin Bippus, Simon Lloyd and Daniel Ostry

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Using data on the external positions of global banks in the world's largest banking hub, the UK, and a granular international-banking model, we show that large banks' idiosyncratic net flows into USD debt influence exchange-rate dynamics. UK-resident banks' USD demand is, on average, price-elastic, whereas their counterparties' USD supply is price-inelastic. We document a structural shift—from banks' being price-inelastic before the Global Financial Crisis to price-elastic afterwards—linked to a marked rise in banks' hedging on-balance-sheet USD net exposures via FX derivatives. This change may help explain the tighter link between exchange rates and macroeconomic fundamentals since the crisis.

Keywords: Capital Flows; Exchange Rates; FX Derivatives; International Banking (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 G15 G21 (search for similar items in EconPapers)
Date: 2026-03-10
New Economics Papers: this item is included in nep-fdg, nep-ifn and nep-mon
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Related works:
Working Paper: Granular banking flows and exchange-rate dynamics (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2359

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