FX Funding Shocks and Cross-Border Lending: Fragmentation Matters

44 Pages Posted: 1 Nov 2018

See all articles by Fernando Eguren Martin

Fernando Eguren Martin

Bank of England

Matias Ossandon Busch

Halle Institute for Economic Research

Dennis Reinhardt

Bank of England

Date Written: October 26, 2018

Abstract

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

Eguren Martin, Fernando and Busch, Matias Ossandon and Reinhardt, Dennis, FX Funding Shocks and Cross-Border Lending: Fragmentation Matters (October 26, 2018). Bank of England Working Paper No. 762. Available at SSRN: https://ssrn.com/abstract=3274731 or http://dx.doi.org/10.2139/ssrn.3274731

Fernando Eguren Martin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Matias Ossandon Busch

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Dennis Reinhardt (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
7
Abstract Views
100
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information