Global Banks May Grow More Vulnerable to a Dollar Disruption

IMF Blog, October 11, 2019

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Non-US banks play a key role in dollar lending worldwide, financing transactions such as a Mexican airline buying Brazilian airplanes with US dollar loans obtained from non-US banks.
Non-US banks’ dollar assets rose to $12.4 trillion by mid-2018 from $9.7 trillion in 2012.
Non-US banks’ dollar assets remain comparable to pre-crisis levels relative to their total assets.

Unlike US banks, non-US banks have limited access to a stable base of dollar deposits and therefore rely heavily on short-term and potentially more volatile funding sources, such as commercial paper and loans from other banks.
When short-term funding is insufficient, non-US banks turn to foreign currency swaps, which are more expensive and can be unreliable in times of stress.
An increase in dollar funding costs can reverberate across the global financial system and boost the odds of bank defaults in home economies of non-US banks.

Cross-currency funding gap:
- Has widened to about $1.4 trillion, or 13 percent of assets, from $1 trillion, or 10 percent of assets, in mid-2008.
- Reflects the amount of financing that must be filled by instruments like foreign currency swaps, increasing vulnerability.
Highly liquid dollar assets measure:
- Shows that dollar liquidity has improved since the crisis but remains lower than the overall liquidity of banks’ balance sheets.
US dollar stable funding ratio:
- Reflects banks’ ability to fund dollar assets over a long time horizon using stable sources.
- Has improved only moderately since 2008.

Higher dollar funding costs:
- Increase the odds of bank defaults in home economies of non-US banks that rely on dollar funding.
- Increase stress in third countries that receive loans from non-US banks.
Emerging-market borrowers are most vulnerable because they cannot easily find alternative sources of funding.
US dollar funding fragility can act as an amplifier: negative effects are especially pronounced when any of the chapter’s measures indicates heightened vulnerability.

Strengthen overall health of the banking system:
- More profitable, better capitalized banks provide a cushion against dollar disruptions.
Build larger reserve holdings:
- Central bank reserves can be used to fill dollar liquidity gaps if they dry up.
Maintain or arrange central bank swap lines:
- Central bank swap arrangements that provide access to US dollars during periods of stress can play an important role, as they did during the 2007-2008 crisis.
Improve measurement and monitoring:
- Use the developed set of indicators to properly measure non-US banks’ exposure to dollar funding and their vulnerability.

Source: IMF blog post "Global Banks May Grow More Vulnerable to a Dollar Disruption" (October 11, 2019).