Global Banks' Dollar Funding: A Source of Financial Vulnerability

51 Pages Posted: 23 Jul 2020

See all articles by Adolfo Barajas

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Andrea Deghi

International Monetary Fund (IMF)

Claudio Raddatz

International Monetary Fund (IMF)

Dulani Seneviratne

International Monetary Fund (IMF)

Peichu Xie

International Monetary Fund (IMF)

Yizhi Xu

International Monetary Fund (IMF)

Date Written: July 1, 2020

Abstract

Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems' resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.

Keywords: External sector, Financial crises, Financial institutions, Macroprudential policies and financial stability, Financial systems, US dollar funding, financial stability risks, cross-currency basis, global banks, international liquidity, WP, home economy, VIX, financial stress, CCB, asset ratio

JEL Classification: E43, F31, G01, G15, G21, E01, E52, F16, E5

Suggested Citation

Barajas, Adolfo and Deghi, Andrea and Raddatz, Claudio and Seneviratne, Dulani and Xie, Peichu and Xu, Yizhi, Global Banks' Dollar Funding: A Source of Financial Vulnerability (July 1, 2020). IMF Working Paper No. 20/113, Available at SSRN: https://ssrn.com/abstract=3658587

Adolfo Barajas (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

Andrea Deghi

International Monetary Fund (IMF) ( email )

700 19th St NW
Washington, DC DC 20431
United States

Claudio Raddatz

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dulani Seneviratne

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Peichu Xie

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yizhi Xu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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