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FX funding shocks and cross-border lending: fragmentation matters

Fernando Eguren-Martin (), Matias Ossandon Busch () and Dennis Reinhardt ()
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Fernando Eguren-Martin: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Matias Ossandon Busch: Halle Institute for Economic Research

Authors registered in the RePEc Author Service: Fernando Eguren Martin

No 762, Bank of England working papers from Bank of England

Abstract: This paper provides novel empirical evidence on the existence of a cross-border bank lending channel arising from funding shocks in FX swap markets (‘CIP deviations’). Using balance sheet data from UK banks we show that when the cost of obtaining funds in a particular foreign currency increases, banks reduce the supply of cross-border credit in that currency. Notably, this effect is increasing in the degree of banks’ reliance on swap-based FX funding. Fragmentation in funding markets appears to play an important role: we find that high access to foreign FX funding in general, and to internal capital markets in particular, shields banks’ cross-border FX lending supply from the described channel.

Keywords: Cross-border bank lending; covered interest rate parity deviations; FX swaps; internal capital markets (search for similar items in EconPapers)
JEL-codes: F34 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-ifn
Date: 2018-10-26
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