Business Models and Dollar Funding of Global Banks

49 Pages Posted: 26 Mar 2018

See all articles by Iñaki Aldasoro

Iñaki Aldasoro

Bank for International Settlements (BIS)

Torsten Ehlers

Bank for International Settlements (BIS)

Egemen Eren

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: March 2018

Abstract

Since the eurozone crisis, there has been a stark divergence between European banks and Japanese banks in their dollar uses and sources. We show that these shifts have implications for the price of dollar funding. We document a "Japan Repo Premium." Japanese banks pay a premium for repos with US money market funds (MMFs), despite identical contract and risk characteristics. Using the US MMF reform as a natural experiment, we establish that Japanese banks' long maturity dollar assets generate a relatively inelastic demand for long maturity dollar borrowing. Differences in the demand for dollar funding combined with market and supply side frictions can explain these pricing differences. MMFs mainly provide short term repos and favor longer term clients for long maturity repos. Japanese banks concentrate their repo borrowing, reducing their bargaining power in order to extend their funding maturity. Our results have implications for the formation of global dollar funding networks. We provide evidence for European banks intermediating repos to Japanese banks, with economically significant estimated spreads from maturity transformation.

Keywords: global banks, dollar funding, money market funds, relationship frictions, US Money Market Fund reform

JEL Classification: G15, F30, G21, G28

Suggested Citation

Aldasoro, Iñaki and Ehlers, Torsten and Eren, Egemen, Business Models and Dollar Funding of Global Banks (March 2018). BIS Working Paper No. 708. Available at SSRN: https://ssrn.com/abstract=3146880

Iñaki Aldasoro

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Torsten Ehlers

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Egemen Eren (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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