Dollar Funding Fragility and non-US Global Banks

Philippe Bacchetta, J. Scott Davis and Eric van Wincoop
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Philippe Bacchetta: University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute
J. Scott Davis: Federal Reserve Banks - Federal Reserve Bank of Dallas
Eric van Wincoop: University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

No 25-65, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Global non-US banks have significant dollar exposure both on and off their balance sheet. We develop a model to analyze their adjustment to dollar funding shocks, whether from reduced direct lending or external dollar shortages. The model provides insight into banks' responses through borrowing, lending, and FX swap positions, as well as the impact on their net worth, their probability of default and CIP deviations. Implications of the model are confronted with data on the response of non-US global banks to major dollar funding shocks. We examine the benefits from buffering these shocks through central bank dollar swap lines or local currency lending by the central bank.

Pages: 44 pages
Date: 2025-07
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2565

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