Global Banks’ Dollar Funding: A Source of Financial Vulnerability

Author/Editor:

Adolfo Barajas ; Andrea Deghi ; Claudio Raddatz ; Dulani Seneviratne ; Peichu Xie ; Yizhi Xu

Publication Date:

July 3, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 2020/113

Subject:

Frequency:

regular

English

Publication Date:

July 3, 2020

ISBN/ISSN:

9781513549149/1018-5941

Stock No:

WPIEA2020113

Pages:

50

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