An Imbalance in Global Banks’ Dollar Funding
IMF Blog, June 12, 2018
Source details
- Canonical URL
- An Imbalance in Global Banks’ Dollar Funding
Other formats
Bibliographic details
- Authors: John Caparusso, Yingyuan Chen, Hideo Hashimoto, David Jones, Will Kerry, Aki Yokoyama
- Published: June 12, 2018
Overview
- Publication date: June 12, 2018
- Key premise: Most of the $7 trillion in banks’ dollar lending outside the United States is handled by banks based in Europe, Japan and elsewhere, not by US banks.
- Central concern: Non-US banks that intermediate dollar funding for international borrowers face currency-specific liquidity and funding vulnerabilities that are not captured by consolidated regulatory metrics.
Structure of international dollar funding
- Majority of dollar lending outside the United States is intermediated by non-US banks (Europe, Japan, and elsewhere).
- Non-US banks cannot readily tap dollars deposited at their US subsidiaries to finance dollar lending outside the United States.
- These banks rely heavily on less-stable funding sources to support international dollar balance sheets, including:
- interbank deposits
- commercial paper
- swaps
Measured liquidity and funding shortfalls
- Liquidity coverage ratios (LCRs) improved for banks’ global consolidated balance sheets but are meaningfully higher than LCRs computed on international dollar balance sheets (which exclude US subsidiaries).
- An estimated stable funding ratio is much lower for international dollar positions than for overall consolidated balance sheets.
- Example statistic: swaps cover over 30 percent of Japanese banks’ dollar funding needs.
Forces that could raise dollar funding costs
- US Treasury is issuing more T-bills, potentially putting upward pressure on interest rates non-US banks must pay for short-term dollar funding.
- The new tax law is expected to encourage US corporations to repatriate cash and possibly shift cash out of bank funding instruments.
- The Federal Reserve’s interest-rate increases and the gradual reduction of securities holdings on its balance sheet would ultimately lift funding costs for all borrowers.
Differential vulnerabilities across banking systems
- Not all banking systems are equally vulnerable; analysis suggests dollar liquidity ratios at French and German banks are not as strong as their peers.
- Some banks may be overly reliant on potentially fragile cross-currency swap markets; while much of swap borrowing can be long-term, access to swaps may be compromised under stress conditions.
Risk channels and scenarios
- Market tightening combined with international dollar balance sheet vulnerabilities could trigger funding problems under market strains.
- Possible dynamics under stress:
- Funding sources could dry up quickly, making it difficult for banks to manage currency gaps in volatile swap markets.
- Banks might be unable to roll over short-term dollar funding.
- Funding pressures could compel banks to sell assets in turbulent markets, amplifying market strains.
- Banks could shrink dollar lending to non-US borrowers, reducing credit availability.
Policy implications and recommendations
- Banks should ensure currency-specific liquidity risks within individual entities in their banking groups continue to be managed effectively.
- Regulators should address foreign currency liquidity mismatches through:
- more disclosure
- currency-specific liquidity standards
- stress tests
- resolution planning
- Central banks’ swap lines, already in place to provide foreign exchange liquidity in times of stress, should be maintained as a last resort backstop.
An Imbalance in Global Banks’ Dollar Funding — IMF blog, June 12, 2018
