## anea2020001 - INTRODUCTION ## Source details **Canonical URL:** [anea2020001 - INTRODUCTION](https://www.imf.org/-/media/files/publications/gfs-notes/2020/english/anea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfs-notes/2020/english/anea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/gfs-notes/2020/english/anea2020001.pdf.json) --- ### Introduction and scope - US dollar dominance in international trade and financial transactions implies that disruptions in US dollar funding outside the United States have implications for global financial stability. - The note focuses on global non-US banks and developments in US dollar funding conditions, presenting: - recent developments in offshore US dollar funding costs as reflected in the cross-currency basis; - the role of traditional and new drivers in the March surge in US dollar funding costs; - the possible role of the Federal Reserve’s announcements of swap lines with major central banks; and - whether there are signs of financial stress in home economies of global non-US banks or in their cross-border lending. - Cutoff date for the analysis in this note is April 30, 2020. ### The cross-currency basis (CCB): definition and mechanics - Definition: the cross-currency basis is the difference between the direct cost of funding in US dollar wholesale markets and the cost of synthetic US dollar funding (funding in another currency and using foreign exchange derivatives to convert to US dollars). - Demand for synthetic funding arises from: - global non-US banks filling the gap between their US dollar assets and direct funding in US dollars; and - institutional investors outside the United States who hold a significant portion of their assets in US dollars. - Supply of synthetic funding is provided by banks and, increasingly, by other financial intermediaries such as prime money market funds. - When direct US dollar funding conditions tighten, demand for synthetic dollar funding increases, widening the cross-currency basis (making it more negative). The same occurs when the supply of synthetic US dollar funding declines. - When US dollar funding conditions are relatively loose, the basis exhibits small, or even positive, values. ### Developments as the pandemic evolved (key statistics and timing) - Signs of stress in offshore US dollar funding markets erupted in mid-March as the COVID-19 pandemic spread across the world. - The cross-currency basis widened significantly for major advanced and emerging market economies in mid-March, with the median widening by about 55 basis points compared with early January. - The cross-currency basis narrowed more recently and moved into positive territory for several currencies (euro, Japanese yen, British pound, Swiss franc), though it remained negative and wider than last year for some emerging market currencies (Malaysian ringgit, Philippine peso). - The median basis at its mid-March peak was still well below what was observed during the peak of the global financial crisis for most currencies; however, for some currencies—including the Canadian dollar, Hong Kong dollar, and Mexican peso—the widening was larger than during the global financial crisis. - Timing around the WHO pandemic declaration: - The cross-currency basis started to widen across economies as the number of confirmed COVID-19 cases began to rise. - The cross-currency basis widened more sharply immediately after the WHO declared the outbreak a global pandemic on March 11, 2020. - The cross-currency basis widened by about 40 basis points and 70 basis points in advanced and emerging market economies, respectively, in the week following the announcement. - Cross-country heterogeneity in the mid-March week following the WHO announcement: - Japanese yen widened by about 80 basis points. - Canadian dollar widened by about 43 basis points. - Malaysian ringgit and Philippine peso basis widened by about 90 basis points. - Mexican peso widened by about 30 basis points. ### Drivers of the cross-currency basis: standard drivers and model performance - Standard drivers that moved in the direction of widening the CCB in March 2020: - Increases in the term spread differential (as the Federal Reserve drastically reduced the target interest rate). - Increase in the broad US dollar index. - Increase in the bid-ask spread. - Widening of the LIBOR-OIS spread, reflecting freezing up of short-term funding markets in the United States. - Rising implied volatility of domestic currencies of the home economies. - Countervailing effect: - Rapid increase in the Chicago Board Options Exchange Volatility Index (VIX), from about 10 in early January to above 80 in late March, is expected to have a narrowing effect by dampening demand for risky investments denominated in dollars. - Country-specific funding vulnerability: - Proxied by the cross-currency funding gap (gap between US dollar assets and liabilities) and the cross-currency funding ratio (gap scaled by US dollar assets). - The aggregate cross-currency funding gap and the cross-currency funding ratio have increased for many countries, with considerable variation across economies. - Economies with a higher cross-currency funding ratio before the pandemic (such as Japan) experienced a significantly wider cross-currency basis. - Model predictions vs. actuals: - Standard drivers explain only part of the variation. Predicted values pointed to a substantial narrowing of the cross-currency basis in five of nine analyzed currencies, whereas the cross-currency basis in fact widened in all but one. - The March prediction error is in the ballpark of what was observed at the peak during the global financial crisis, though for some currencies (Canadian dollar, Hong Kong dollar, Japanese yen, Malaysian ringgit) the error was noticeably larger in March. - Possible additional factors behind prediction errors: - Magnified impact of existing vulnerabilities as risk-off sentiment intensified. - An overreaction in US dollar funding markets. - Unprecedented increase in uncertainty caused by the pandemic as reflected in the Infectious Disease Equity Market Volatility Index. - Nature of the COVID-19 shock differs from the global financial crisis: - Global financial crisis: a financial sector shock that propagated from US short-term funding markets to global US dollar funding markets. - COVID-19 shock: pertains to the real sector, causing liquidity shortages for companies amid shutdowns in activity while reducing demand for credit for international trade or cross-border investment. - There has been unprecedented fiscal and monetary policy support in the United States and across the world. - Multiple factors imply the nature, scale, and speed of propagation of the COVID-19 shock may not be fully captured by traditional models. - Model augmentations: - Additional specifications included nonlinear terms for the VIX and interaction terms with variables such as the cross-currency funding ratio; these augmentations improved model fit and lowered forecast error for a majority of currencies. ### Structural developments since the global financial crisis (market-structure changes) - Institutional investors (insurers and pension funds) hold globally diversified portfolios and engage in swap agreements to hedge foreign currency investments; their portfolios and hedging needs have surged. - As of end-June 2019, total notional amounts outstanding for foreign exchange contracts were $92 trillion, with foreign currency swaps estimated to account for about 30 percent of outstanding notional amounts. - Anecdotal evidence suggests institutional investors may have contributed to about 65 percent of the increase in local hedging demand since the global financial crisis. - Nonfinancial firms seeking to borrow opportunistically in markets where credit spreads are narrower could increase demand for synthetic dollar funding to avoid currency mismatches—particularly relevant in emerging market economies where reliance of firms and quasi-sovereigns on dollar liquidity has risen rapidly in the past decade. ### 1. Actual and Predicted CCB in March 2020 ### Stress in the Commercial Paper (CP) market (key figures and timing) - The size of the nonfinancial commercial paper market "has also increased almost threefold over the past decade." - With the unfolding of the COVID-19 pandemic, there was a dramatic shift by money market investors away from prime money market funds into government money market funds. - Prime money market fund outflows contributed to a sharp increase in funding costs in commercial paper markets and tightened funding available for large corporations, notably foreign firms seeking direct US dollar funding. - As of March 16, 2020, the three-month spreads for nonfinancial and financial commercial paper rose to more than 110 basis points. - The Federal Reserve announced the establishment of a commercial paper funding facility (CPFF) on March 17, 2020. The initial pricing to access the facility was the three-month OIS rate plus 200 basis points. - Despite minimal initial use of the CPFF due to its pricing, the intervention appears to have helped ease pressure in the market. - Tightening in the commercial paper market likely put additional strain on obtaining synthetic US dollar funding from foreign currency swap markets and led corporate borrowers to draw down credit lines from global US banks, reducing capacity to supply foreign currency hedging. ### Impact of Federal Reserve swap lines on US dollar funding (estimates) - Timeline of major actions: - March 15, 2020: Federal Reserve announced coordinated action with five central banks (Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank) to enhance US dollar liquidity by lowering pricing on standing swap arrangements by 25 basis points. - March 19, 2020: Federal Reserve announced additional swap lines with nine other central banks/monetary authorities (Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, Singapore, Sweden). - Estimated effects from regression controlling for exchange volatility, bid-ask spread, US dollar index, VIX, expected default frequency, LIBOR-OIS spread, and international-reserves-to-GDP: - Announcements are associated with a significant narrowing of the three-month CCB by about 80 basis points for swap line currencies (including those with outstanding and newly announced swap lines). - The effect on non-swap-line currencies is not statistically significant. - Additional policy action: - March 31: Federal Reserve announced the temporary FIMA Repo Facility (effective April 6, 2020), allowing FIMA account holders to enter into repurchase agreements to exchange US Treasury securities for US dollars. Data on individual repurchases were not available for meaningful impact analysis. ### Home-country financial stress and spillovers to recipient economies (empirical findings) - Home economies: - An increase in US dollar funding costs tended to be associated with intensifying financial stress in the home economies of global non-US banks. - The March 2020 episode was accompanied by an increase of about 0.3 percentage point in the expected default frequency (EDF) in home-economy banking systems. - Average increases were larger for emerging market home economies than for advanced home economies: 0.4 versus 0.2 percentage point, respectively. - Expected default frequency showed limited response to swap line arrangements; the difference between pre- and post-swap-line EDF is statistically insignificant. - Recipient economies: - Banking system EDF in recipient economies increased by about 0.4 percentage point on average since the end of February. - The increase was larger for emerging market recipients, with an average rise of 0.8 percentage point. - Tightening US dollar funding conditions correlated positively with a tightening of domestic financial conditions; the change in domestic financial conditions index (FCI) during 2020:Q1 is positively correlated with the change in the CCB (slope statistically significant at the 10 percent level, p-value=0.06). - Syndicated lending and lending composition: - Syndicated-loan-level data indicate the US dollar share of syndicated lending declined in the first quarter of 2020, with a more pronounced decline for home economies experiencing sharper widening of the CCB. - Emerging market economy borrowers were particularly affected by the decline in US dollar syndicated lending to recipients. ### Empirical samples, regression design, and notable data points - Samples referenced: - Home economies EDF: sample of 24 home economies (based on October 2019 GFSR, Chapter 5). - Recipient economies EDF: total of 27 recipient economies. - Cross-sectional analysis of change in domestic FCI vs. change in CCB: 19 observations (economies with available data). - Syndicated lending sample includes: Australia, Canada, China, Denmark, the euro area, Hong Kong SAR, India, Japan, Korea, Malaysia, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. - Regression modeling notes: - Coefficients estimated using a staggered difference-in-difference model over February 1, 2020, to April 30, 2020. - Swap line currencies listed for treatment groups include: Australian dollar, Brazilian real, Canadian dollar, Danish krone, euro, British pound, Japanese yen, Mexican peso, New Zealand dollar, Norwegian krone, Singapore dollar, South Korean won, Swedish krona, and Swiss franc. - Non-swap-line currencies include: Chinese renminbi, Hong Kong dollar, Indian rupee, Israeli shekel, Malaysian ringgit, Philippine peso, Russian ruble, South African rand, and Thai baht. ### Key conclusions and policy-relevant findings (bulleted) - Drivers and prediction performance: - The sharp increase in US dollar funding costs in mid-March—evidenced by the widening CCB—can be partly explained by standard drivers: increase in term spread differential, broad US dollar index, bid-ask spread, and LIBOR-OIS spread. - The sharp jump in the VIX operated in the opposite direction in the model compared with the October 2019 GFSR. - Standard cross-currency-basis models tended to underestimate the actual widening in March 2020. Possible explanations include structural changes in dollar funding markets over the past 10 years, unprecedented pandemic-related uncertainty, and disruptions in the commercial paper market. - Differences between the COVID-19 shock and the global financial crisis—particularly greater implications for firms’ solvency rather than liquidity—highlight the need to better understand transmission channels and associated vulnerabilities beyond standard demand and supply drivers for synthetic US dollar funding. - Effectiveness of swap lines and subsequent conditions: - The Federal Reserve’s swap line arrangements helped lessen strains in US dollar funding markets, leading to narrowing of the CCB. - On average, the cross-currency basis reverted to zero in April, though for some emerging market economies it remained wider than historical norms. - Financial stability implications: - Tighter US dollar funding conditions coincided with upticks in banking-sector expected default frequency in home economies of affected non-US global banks; US dollar liquidity is one of several factors that could undermine banking-system resilience. - Tight dollar liquidity conditions were associated with negative spillovers to economies that borrow in US dollars; home economies more affected by rising dollar funding costs tended to reduce US dollar cross-border lending, especially to emerging market borrowers, and financial conditions in recipient economies deteriorated. *Source: anea2020001 - INTRODUCTION; 1. Actual and Predicted CCB in March 2020 (IMF Monetary and Capital Markets)* ### INTRODUCTION ### anea2020001 - INTRODUCTION ### INTRODUCTION - US dollar dominance in international trade and financial transactions implies that disruptions in US dollar funding outside the United States have implications for global financial stability. - The US dollar is the most common invoice currency in world trade; a substantial portion of foreign exchange transactions worldwide involve US dollars. - Global non-US banks play a key role in US dollar lending worldwide; their access to stable US dollar deposits outside the United States is limited, so they tend to resort to international wholesale markets, a generally shorter-term and more volatile source. - Tightness in offshore US dollar funding conditions can translate into financial stress in the home economies of global non-US banks and be transmitted to other economies via cutbacks in cross-border lending; this occurred during the 2008–09 global financial crisis. - Strains in US dollar funding reemerged toward the end of the first quarter of 2020, particularly after the World Health Organization (WHO) declared the COVID-19 outbreak a pandemic on March 11. - This note focuses on global non-US banks and developments in US dollar funding conditions, presenting: recent developments in offshore US dollar funding costs as reflected in the cross-currency basis; the role of traditional and new drivers in the March surge in US dollar funding costs; the possible role of the Federal Reserve’s announcements of swap lines with major central banks; and whether there are signs of financial stress in home economies of global non-US banks or in their cross-border lending. - The focus is on broad principles for deciding when to intervene in distressed markets. ### THE CROSS-CURRENCY BASIS - Definition: the cross-currency basis is the difference between the direct cost of funding in US dollar wholesale markets and the cost of synthetic US dollar funding (funding in another currency and using foreign exchange derivatives to convert to US dollars). - Demand for synthetic funding arises from: - global non-US banks filling the gap between their US dollar assets and direct funding in US dollars, and - institutional investors outside the United States who hold a significant portion of their assets in US dollars. - Supply of synthetic funding is provided by banks and, increasingly, by other financial intermediaries such as prime money market funds. - When direct US dollar funding conditions tighten, demand for synthetic dollar funding increases, widening the cross-currency basis (making it more negative). The same occurs when the supply of synthetic US dollar funding declines. - When US dollar funding conditions are relatively loose, the basis exhibits small, or even positive, values. ### DEVELOPMENTS AS THE PANDEMIC EVOLVED - Signs of stress in offshore US dollar funding markets erupted in mid-March as the COVID-19 pandemic spread across the world. - The cross-currency basis widened significantly for major advanced and emerging market economies in mid-March, with the median widening by about 55 basis points compared with early January. - The cross-currency basis has narrowed more recently and has moved into positive territory for several currencies, such as the euro, Japanese yen, British pound, and Swiss franc, though it remains negative and wider than last year for some emerging market currencies, such as the Malaysian ringgit and the Philippine peso. - The median basis at its mid-March peak was still well below what was observed during the peak of the global financial crisis for most currencies; however, for some currencies—including the Canadian dollar, Hong Kong dollar, and Mexican peso—the widening has been larger than during the global financial crisis. - Timing: - The cross-currency basis started to widen across economies as the number of confirmed COVID-19 cases began to rise. - The cross-currency basis widened more sharply immediately after the WHO declared the outbreak a global pandemic on March 11, 2020. - The cross-currency basis widened by about 40 basis points and 70 basis points in advanced and emerging market economies, respectively, in the week following the announcement. - Cross-country heterogeneity in mid-March week following WHO announcement: - Japanese yen widened by about 80 basis points. - Canadian dollar widened by about 43 basis points. - Malaysian ringgit and Philippine peso basis widened by about 90 basis points. - Mexican peso widened by about 30 basis points. - Cutoff date for the analysis in this note is April 30, 2020. ### DRIVERS OF THE CROSS-CURRENCY BASIS - Standard drivers identified in prior research generally moved in the direction of widening the cross-currency basis in March 2020: - Increases in the term spread differential (as the Federal Reserve drastically reduced the target interest rate in response to the COVID-19 crisis). - Increase in the broad US dollar index. - Increase in the bid-ask spread. - Widening of the LIBOR-OIS spread, reflecting freezing up of short-term funding markets in the United States. - Rising implied volatility of domestic currencies of the home economies. - Countervailing effect: - Rapid increase in the Chicago Board Options Exchange Volatility Index (VIX), from about 10 in early January to above 80 in late March, is expected to have a narrowing effect by dampening demand for risky investments denominated in dollars. - Country-specific funding vulnerability: - Proxied by the cross-currency funding gap (gap between US dollar assets and liabilities) and the cross-currency funding ratio (gap scaled by US dollar assets). - The aggregate cross-currency funding gap and the cross-currency funding ratio have increased for many countries, with considerable variation across economies. - Economies with a higher cross-currency funding ratio before the pandemic (such as Japan) experienced a significantly wider cross-currency basis. - Model predictions vs. actuals: - Standard drivers explain only part of the variation. Comparing actual average cross-currency basis in March with predictions from a model including standard drivers shows a portion of the widening remains unexplained. - Predicted values point to a substantial narrowing of the cross-currency basis in five of nine analyzed currencies, whereas the cross-currency basis in fact widened in all but one. - The March prediction error is in the ballpark of what was observed at the peak during the global financial crisis, though for some currencies (Canadian dollar, Hong Kong dollar, Japanese yen, Malaysian ringgit) the error was noticeably larger in March. - Possible additional factors behind prediction errors: - Magnified impact of existing vulnerabilities as risk-off sentiment intensified. - An overreaction in US dollar funding markets. - Unprecedented increase in uncertainty caused by the pandemic as reflected in the Infectious Disease Equity Market Volatility Index. - Nature of the COVID-19 shock differs from the global financial crisis: - Global financial crisis was a financial sector shock that propagated from US short-term funding markets to global US dollar funding markets. - The COVID-19 shock pertains to the real sector, causing liquidity shortages for companies amid shutdowns in activity while reducing demand for credit for international trade or cross-border investment. - There has been unprecedented fiscal and monetary policy support in the United States and across the world. - Multiple factors imply the nature, scale, and speed of propagation of the COVID-19 shock may not be fully captured by traditional models. - Model augmentations: - Additional specifications included nonlinear terms for the VIX and interaction terms with variables such as the cross-currency funding ratio; these augmentations improved model fit and lowered forecast error for a majority of currencies. ### STRUCTURAL DEVELOPMENTS SINCE THE GLOBAL FINANCIAL CRISIS - Market-structure changes that may have contributed to recent tightening in US dollar funding markets: - Institutional investors (insurers and pension funds) hold globally diversified portfolios and engage in swap agreements to hedge foreign currency investments; their portfolios and hedging needs have surged. - As of end-June 2019, total notional amounts outstanding for foreign exchange contracts were $92 trillion, with foreign currency swaps estimated to account for about 30 percent of outstanding notional amounts. - Anecdotal evidence suggests institutional investors may have contributed to about 65 percent of the increase in local hedging demand since the global financial crisis. - Nonfinancial firms seeking to borrow opportunistically in markets where credit spreads are narrower could increase demand for synthetic dollar funding to avoid currency mismatches—particularly relevant in emerging market economies where reliance of firms and quasi-sovereigns on dollar liquidity has risen rapidly in the past decade. *IMF | Monetary and Capital Markets — anea2020001 - INTRODUCTION* ### 1. Actual and Predicted CCB in March 2020 ### 1. Actual and Predicted CCB in March 2020 ### Stress in the Commercial Paper (CP) Market - The size of the nonfinancial commercial paper market "has also increased almost threefold over the past decade." - With the unfolding of the COVID-19 pandemic, there was a dramatic shift by money market investors away from prime money market funds into government money market funds. - Prime money market fund outflows contributed to a sharp increase in funding costs in commercial paper markets and tightened funding available for large corporations, notably foreign firms seeking direct US dollar funding. - Tightening in the commercial paper market likely put additional strain on obtaining synthetic US dollar funding from foreign currency swap markets and led corporate borrowers to draw down credit lines from global US banks, reducing capacity to supply foreign currency hedging. - Market dynamics and key observations: - As of March 16, 2020, the three-month spreads for nonfinancial and financial commercial paper rose to more than 110 basis points. - The Federal Reserve announced the establishment of a commercial paper funding facility (CPFF) on March 17, 2020. The initial pricing to access the facility was the three-month OIS rate plus 200 basis points. - Despite minimal initial use of the CPFF due to its pricing, the intervention appears to have helped ease pressure in the market. ### Impact of Federal Reserve Swap Lines on US Dollar Funding - Timeline of major actions: - March 15, 2020: Federal Reserve announced coordinated action with five central banks (Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank) to enhance US dollar liquidity by lowering pricing on standing swap arrangements by 25 basis points. - March 19, 2020: Federal Reserve announced additional swap lines with nine other central banks/monetary authorities (Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, Singapore, Sweden). - Estimated effects: - Regression results controlling for exchange volatility, bid-ask spread, US dollar index, VIX, expected default frequency, LIBOR-OIS spread, and international-reserves-to-GDP show the announcements are associated with a significant narrowing of the three-month cross-currency basis (CCB) by about 80 basis points for swap line currencies (including those with outstanding and newly announced swap lines). - The effect on non-swap-line currencies is not statistically significant. - Additional policy actions noted around the same period: - March 31: Federal Reserve announced the temporary FIMA Repo Facility (effective April 6, 2020), allowing FIMA account holders to enter into repurchase agreements to exchange US Treasury securities for US dollars. Data on individual repurchases were not available for meaningful impact analysis. ### Home-Country Financial Stress and Spillovers to Recipient Economies - Home economies: - An increase in US dollar funding costs tended to be associated with intensifying financial stress in the home economies of global non-US banks. - The March 2020 episode was accompanied by an increase of about 0.3 percentage point in the expected default frequency (EDF) in home-economy banking systems. - Average increases were larger for emerging market home economies than for advanced home economies: 0.4 versus 0.2 percentage point, respectively. - Expected default frequency showed limited response to swap line arrangements; the difference between pre- and post-swap-line EDF is statistically insignificant. - Recipient economies: - Banking system expected default frequency in recipient economies increased by about 0.4 percentage point on average since the end of February. - The increase was larger for emerging market recipients, with an average rise of 0.8 percentage point. - Tightening US dollar funding conditions correlated positively with a tightening of domestic financial conditions; the change in domestic financial conditions index (FCI) during 2020:Q1 is positively correlated with the change in the CCB (slope statistically significant at the 10 percent level, p-value=0.06). - Syndicated lending and lending composition: - Syndicated-loan-level data indicate the US dollar share of syndicated lending declined in the first quarter of 2020, with a more pronounced decline for home economies experiencing sharper widening of the CCB. - Emerging market economy borrowers were particularly affected by the decline in US dollar syndicated lending to recipients. ### Empirical Samples and Notable Data Points - Samples referenced: - Home economies EDF: sample of 24 home economies (based on October 2019 GFSR, Chapter 5). - Recipient economies EDF: total of 27 recipient economies. - Cross-sectional analysis of change in domestic FCI vs. change in CCB: 19 observations (economies with available data). - Syndicated lending sample includes: Australia, Canada, China, Denmark, the euro area, Hong Kong SAR, India, Japan, Korea, Malaysia, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. - Regression modeling notes: - Coefficients estimated using a staggered difference-in-difference model over February 1, 2020, to April 30, 2020. - Swap line currencies listed for treatment groups include: Australian dollar, Brazilian real, Canadian dollar, Danish krone, euro, British pound, Japanese yen, Mexican peso, New Zealand dollar, Norwegian krone, Singapore dollar, South Korean won, Swedish krona, and Swiss franc. - Non-swap-line currencies include: Chinese renminbi, Hong Kong dollar, Indian rupee, Israeli shekel, Malaysian ringgit, Philippine peso, Russian ruble, South African rand, and Thai baht. ### Key Conclusions and Policy-Relevant Findings - Drivers and prediction performance: - The sharp increase in US dollar funding costs in mid-March—evidenced by the widening CCB—can be partly explained by standard drivers: increase in term spread differential, broad US dollar index, bid-ask spread, and LIBOR-OIS spread. The sharp jump in the VIX operated in the opposite direction in the model from the October 2019 GFSR. - Standard cross-currency-basis models tended to underestimate the actual widening in March 2020. Possible explanations include structural changes in dollar funding markets over the past 10 years, unprecedented pandemic-related uncertainty, and disruptions in the commercial paper market. - Differences between the COVID-19 shock and the global financial crisis—particularly greater implications for firms’ solvency rather than liquidity—highlight the need to better understand transmission channels and associated vulnerabilities beyond standard demand and supply drivers for synthetic US dollar funding. - Effectiveness of swap lines and subsequent conditions: - The Federal Reserve’s swap line arrangements helped lessen strains in US dollar funding markets, leading to narrowing of the CCB. - On average, the cross-currency basis reverted to zero in April, though for some emerging market economies it remained wider than historical norms. - Financial stability implications: - Tighter US dollar funding conditions coincided with upticks in banking-sector expected default frequency in home economies of affected non-US global banks; US dollar liquidity is one of several factors that could undermine banking-system resilience. - Tight dollar liquidity conditions were associated with negative spillovers to economies that borrow in US dollars; home economies more affected by rising dollar funding costs tended to reduce US dollar cross-border lending, especially to emerging market borrowers, and financial conditions in recipient economies deteriorated. *Source: anea2020001 - 1. Actual and Predicted CCB in March 2020 (IMF Monetary and Capital Markets)* --- _Source: https://www.imf.org/-/media/files/publications/gfs-notes/2020/english/anea2020001.pdf_