The US Dollar Funding Premium of Global Banks

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.

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

JEL Classification: G1, G11, G15, G21