Strains in Offshore US Dollar Funding during the COVID-19 Crisis: Some Observations

Global Financial Stability Notes, July 24, 2020

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Canonical URL: Strains in Offshore US Dollar Funding during the COVID-19 Crisis: Some Observations

Authors: Adolfo Barajas, Andrea Deghi, Salih Fendoglu, Yizhi Xu
Date: July 24, 2020
Series: Global Financial Stability Notes No 2020/001; Issue: 001; Volume: 2020; Pages: 13
DOI: https://doi.org/10.5089/9781513550336.065
ISBN: 9781513550336; ISSN: 2791-3112
Subject tags: Banking, Commercial banks, COVID-19, Currencies, Emerging and frontier financial markets, Financial crises, Financial institutions, Financial markets, Global financial crisis of 2008-2009, Health, Money, Money markets
Keywords include: commercial paper market, Federal Reserve's swap line arrangement, Predicted Cross-Currency Basis, liquidity swap line arrangement, tighter dollar

Preliminary evidence indicates that only part of the sharp increase in observed dollar funding costs can be attributed to standard supply- and demand-side factors analyzed in the October 2019 Global Financial Stability Report (GFSR), including the dollar funding fragility of non-US global banks.
Changes in market structure since the global financial crisis may have contributed to movements in dollar funding costs in late March 2020.
Heightened uncertainty and tensions in the commercial paper market may provide further explanations for the late-March 2020 movements in dollar funding costs.

The US Federal Reserve’s swap line arrangements have helped lessen strains in dollar funding markets.
Despite the stabilizing role of swap lines, funding pressure remained significant for some emerging market economies, notably those without access to the swap lines.

Tighter dollar funding conditions appear to have accompanied increases in financial stress in the home economies of affected non-US global banks.
Adverse spill-over effects were observed in the form of cutbacks in cross-border lending.

Standard supply- and demand-side fragilities (as identified in the October 2019 GFSR) explain only part of the dollar funding stress; policymakers should consider:
- Market-structure changes since the global financial crisis when assessing dollar funding vulnerabilities.
- Frictions and strains in the commercial paper market as potential amplifiers of stress.
Swap line access matters for mitigating funding pressures; lack of access correlated with more significant funding pressure in some emerging market economies.

Source: Strains in Offshore US Dollar Funding during the COVID-19 Crisis: Some Observations (Global Financial Stability Notes 2020, 001).