Dollar Funding and the Lending Behavior of Global Banks

51 Pages Posted: 6 Jan 2013 Last revised: 11 Mar 2015

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)

Multiple version iconThere are 3 versions of this paper

Date Written: March 10, 2015

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 also 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 their exposure to European banks in the year that followed. During this period dollar lending by Eurozone banks fell relative to their euro lending, and firms who were more reliant on Eurozone banks before the Eurozone crisis had a more difficult time borrowing.

Keywords: Covered Interest Parity; Dollar Funding; Credit Supply; Global Banks

JEL Classification: E44, F36, G01

Suggested Citation

Ivashina, Victoria and Scharfstein, David S. and Stein, Jeremy C., Dollar Funding and the Lending Behavior of Global Banks (March 10, 2015). Quarterly Journal of Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2196973 or http://dx.doi.org/10.2139/ssrn.2196973

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

Paper statistics

Downloads
138
Rank
22,844
Abstract Views
920