Role of Cross Currency Swap Markets in Funding and Investment Decisions

39 Pages Posted: 12 Aug 2019

See all articles by Thomas Brophy

Thomas Brophy

Central Bank of Ireland

Niko Herrala

European Central Bank (ECB)

Raquel Jurado

Banco de España

Irene Katsalirou

European Central Bank (ECB)

Léa Le Quéau

Banque de France

christian lizarazo

European Central Bank (ECB)

Seamus O’Donnell

Central Bank of Ireland

Date Written: August, 2019

Abstract

A US dollar funding premium in the EUR/USD cross currency swap market has been in existence since 2008. Whilst there are many reasons behind this dislocation, since 2014 the divergence in monetary policy between the euro area and the United States has played a growing role. This paper aims at exploring and gaining more insight into the role the Eurosystem’s Expanded Asset purchase Programme (APP) has had in guiding investment and funding decisions and its influence on the cross currency basis. The downward pressure on yields, exerted by the APP, has made euro assets less attractive and has led investors to search for yield abroad. At the same time, the decline in yields and tighter credit spreads have attracted US corporate issuers to the euro market in search of cheaper funding costs. These cross-border flows from issuers and investors have played a strong role in driving the US dollar funding premium. The purpose of this study is to gauge whether these changing trends in cross-border flows have implications for the implementation of the Eurosystem’s APP. Beyond the structural increase in the US dollar funding premium described above, a cyclical component has led to an amplification of the premium over balance sheet reporting dates, due to new bank regulations. This paper also analyses the behaviour of euro area banks in cross currency swap markets over balance sheet reporting dates, using the money market statistical reporting (MMSR) dataset in order to discern whether the increase in the US dollar funding premium at these specific points in time has an adverse impact on the transmission of monetary policy.

Keywords: balance sheet constraints, balance sheet reporting dates, cross-border investment and funding flows, cross currency basis swap, monetary policy divergence, US dollar funding premium

JEL Classification: D53, E52, G11, G15, G18

Suggested Citation

Brophy, Thomas and Herrala, Niko and Jurado, Raquel and Katsalirou, Irene and Le Quéau, Léa and lizarazo, christian and O’Donnell, Seamus, Role of Cross Currency Swap Markets in Funding and Investment Decisions (August, 2019). ECB Occasional Paper No. 228, Available at SSRN: https://ssrn.com/abstract=3436064

Thomas Brophy (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Niko Herrala

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Raquel Jurado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Irene Katsalirou

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Léa Le Quéau

Banque de France ( email )

Paris
France

Christian Lizarazo

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Seamus O’Donnell

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

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