Abstract

http://ssrn.com/abstract=2117554
 
 

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The US Dollar Funding Premium of Global Banks


Asani Sarkar


Federal Reserve Bank of New York

Warren B. Hrung


Federal Reserve Bank of New York

July 16, 2012


Abstract:     
Following the financial crisis of 2007, many global financial firms faced difficulties in borrowing U.S. dollars (USD). We estimate the premium global banks paid to obtain USD (the “USD basis”) by the rate banks pay to swap euros into USD in the foreign exchange (FX) market, while fully hedging the FX risk, relative to the interbank rate for borrowing USD. We find that the bank basis is higher the day following increases in CDS prices and in asymmetric information measures. Controlling for fundamental risk, the basis is lower the day after successful borrowing at the Fed’s dollar liquidity facilities and it is higher for European banks following an unanticipated decrease in repo funding amounts, implying that USD funding constraints were binding for European banks during the crisis. Our results show that increased asymmetric information and “repo runs” (through unanticipated withdrawals of repo funding) combined to increase bank funding costs during the crisis.

Number of Pages in PDF File: 70

Keywords: Global banks, European banks, US dollar funding risk, asymmetric information, repo funding, Fed liquidity facilities, crisis.

JEL Classification: G1, G11, G15, G21

working papers series


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Date posted: July 25, 2012  

Suggested Citation

Sarkar, Asani and Hrung, Warren B., The US Dollar Funding Premium of Global Banks (July 16, 2012). Available at SSRN: http://ssrn.com/abstract=2117554 or http://dx.doi.org/10.2139/ssrn.2117554

Contact Information

Asani Sarkar (Contact Author)
Federal Reserve Bank of New York ( email )
Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)
HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html
Warren B. Hrung
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
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