Foreign-borne Interest Rate Risk: Effects of Foreign Deposits on Monetary Policy and Bank Balance Sheets

42 Pages Posted: 6 Apr 2024 Last revised: 23 Apr 2024

See all articles by Rashad Ahmed

Rashad Ahmed

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: March 8, 2024

Abstract

Foreign deposits are a key funding source for US commercial banks but subject to a different degree of interest rate risk than domestic deposits. Specifically, foreign deposit betas are significantly larger than domestic deposit betas, implying that the former has shorter effective duration. Rising foreign deposit shares therefore increase the pass-through of monetary policy to bank funding costs and shorten the duration of bank liabilities. Causal evidence exploiting granular bank-level foreign deposits suggests that banks respond to duration mismatch from rising foreign deposit shares by reducing holdings of US Treasuries and Agency MBS. As a result, foreign deposit dynamics jointly affect monetary policy transmission, duration absorbing capacity of the bank sector and aggregate demand for long duration assets.

Keywords: Asset liability management, Convexity, Duration, Eurodollars, Global banks, International spillovers, U.S. Dollar, U.S. Treasuries

JEL Classification: E52, E58, F30, F34, G21

Suggested Citation

Ahmed, Rashad, Foreign-borne Interest Rate Risk: Effects of Foreign Deposits on Monetary Policy and Bank Balance Sheets (March 8, 2024). Available at SSRN: https://ssrn.com/abstract=4753135 or http://dx.doi.org/10.2139/ssrn.4753135

Rashad Ahmed (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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