Institutional Investors, the Dollar, and U.S. Credit Conditions

69 Pages Posted: 24 Apr 2019 Last revised: 29 Apr 2020

See all articles by Friederike Niepmann

Friederike Niepmann

Board of Governors of the Federal Reserve System; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

Date Written: 2019-04-22

Abstract

This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans---and, hence, suppliers of funding for these loans---are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.

Keywords: Leveraged loan market, Commercial and industrial loans, U.S. dollar exchange rate, Credit standards, Institutional investors

JEL Classification: E44, F31, G15, G21, G23

Suggested Citation

Niepmann, Friederike and Schmidt-Eisenlohr, Tim, Institutional Investors, the Dollar, and U.S. Credit Conditions (2019-04-22). FRB International Finance Discussion Paper No. 1246, Available at SSRN: https://ssrn.com/abstract=3376649 or http://dx.doi.org/10.17016/IFDP.2019.1246

Friederike Niepmann (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
47
Abstract Views
389
PlumX Metrics