FX Funding Shocks and Cross-Border Lending: Fragmentation Matters
44 Pages Posted: 1 Nov 2018
Date Written: October 26, 2018
This paper provides novel empirical evidence on the existence of a cross-border bank lending channel arising from funding shocks in FX swap markets (‘CIP deviations’). Using balance sheet data from UK banks we show that when the cost of obtaining funds in a particular foreign currency increases, banks reduce the supply of cross-border credit in that currency. Notably, this effect is increasing in the degree of banks’ reliance on swap-based FX funding. Fragmentation in funding markets appears to play an important role: we find that high access to foreign FX funding in general, and to internal capital markets in particular, shields banks’ cross-border FX lending supply from the described channel.
Keywords: Cross-border bank lending, covered interest rate parity deviations, FX swaps, internal capital markets
JEL Classification: F34, G21
Suggested Citation: Suggested Citation