Dollar Funding Fragility and Non-U.S. Global Banks

Philippe Bacchetta, Jonathan Davis and Eric Van Wincoop

No 2531, Working Papers from Federal Reserve Bank of Dallas

Abstract: Global non-U.S. 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-U.S. 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.

Keywords: GSIB Banks; U.S. Dollar Liquidity; CIP Deviations; Liquidity Swap Lines (search for similar items in EconPapers)
JEL-codes: F30 F40 (search for similar items in EconPapers)
Pages: 43
Date: 2025-08-12
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DOI: 10.24149/wp2531

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