Abstract

http://ssrn.com/abstract=2171265
 
 

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Dollar Funding and the Lending Behavior of Global Banks


Victoria Ivashina


Harvard University; National Bureau of Economic Research (NBER)

David S. Scharfstein


Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Jeremy C. Stein


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

October 31, 2012


Abstract:     
A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.

Number of Pages in PDF File: 46

Keywords: Banks, Global Banks, Credit Supply, Dollar Funding

JEL Classification: E51, G20, G21

working papers series


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Date posted: November 6, 2012  

Suggested Citation

Ivashina, Victoria and Scharfstein, David S. and Stein, Jeremy C., Dollar Funding and the Lending Behavior of Global Banks (October 31, 2012). Available at SSRN: http://ssrn.com/abstract=2171265 or http://dx.doi.org/10.2139/ssrn.2171265

Contact Information

Victoria Ivashina (Contact Author)
Harvard University ( email )
Harvard Business School
Baker Library 233
Boston, MA 02163
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
David S. Scharfstein
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-496-5067 (Phone)
617-496-8443 (Fax)
HOME PAGE: http://www.people.hbs.edu/dscharfstein/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jeremy C. Stein
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)
HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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