{
  "title": "An Imbalance in Global Banks’ Dollar Funding",
  "publication": "IMF Blog, June 12, 2018",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2018/06/12/blog-imbalance-in-global-banks-dollar-funding",
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  "summary": "Publication date: June 12, 2018",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Publication date: June 12, 2018\n- 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.\n- 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."
    },
    {
      "heading": "Structure of international dollar funding",
      "content": "- Majority of dollar lending outside the United States is intermediated by non-US banks (Europe, Japan, and elsewhere).\n- Non-US banks cannot readily tap dollars deposited at their US subsidiaries to finance dollar lending outside the United States.\n- These banks rely heavily on less-stable funding sources to support international dollar balance sheets, including:\n  - interbank deposits\n  - commercial paper\n  - swaps"
    },
    {
      "heading": "Measured liquidity and funding shortfalls",
      "content": "- 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).\n- An estimated stable funding ratio is much lower for international dollar positions than for overall consolidated balance sheets.\n- Example statistic: swaps cover over 30 percent of Japanese banks’ dollar funding needs."
    },
    {
      "heading": "Forces that could raise dollar funding costs",
      "content": "- US Treasury is issuing more T-bills, potentially putting upward pressure on interest rates non-US banks must pay for short-term dollar funding.\n- The new tax law is expected to encourage US corporations to repatriate cash and possibly shift cash out of bank funding instruments.\n- 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."
    },
    {
      "heading": "Differential vulnerabilities across banking systems",
      "content": "- Not all banking systems are equally vulnerable; analysis suggests dollar liquidity ratios at French and German banks are not as strong as their peers.\n- 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."
    },
    {
      "heading": "Risk channels and scenarios",
      "content": "- Market tightening combined with international dollar balance sheet vulnerabilities could trigger funding problems under market strains.\n- Possible dynamics under stress:\n  - Funding sources could dry up quickly, making it difficult for banks to manage currency gaps in volatile swap markets.\n  - Banks might be unable to roll over short-term dollar funding.\n  - Funding pressures could compel banks to sell assets in turbulent markets, amplifying market strains.\n  - Banks could shrink dollar lending to non-US borrowers, reducing credit availability."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Banks should ensure currency-specific liquidity risks within individual entities in their banking groups continue to be managed effectively.\n- Regulators should address foreign currency liquidity mismatches through:\n  - more disclosure\n  - currency-specific liquidity standards\n  - stress tests\n  - resolution planning\n- Central banks’ swap lines, already in place to provide foreign exchange liquidity in times of stress, should be maintained as a last resort backstop.\n\nAn Imbalance in Global Banks’ Dollar Funding — IMF blog, June 12, 2018\n\n---\n\n\n References\n\n- https://www.imf.org/wp-content/uploads/2018/06/eng-may-22-dollar-funding1-4.png\n- https://www.imf.org/wp-content/uploads/2018/06/eng-may-23-dollarfunding3-3.png\n- https://www.imf.org/wp-content/uploads/2018/06/eng-may-22-dollarfunding3-2.png\n\nSource: https://www.imf.org/en/blogs/articles/2018/06/12/blog-imbalance-in-global-banks-dollar-funding"
    }
  ],
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    "Authors: John Caparusso, Yingyuan Chen, Hideo Hashimoto, David Jones, Will Kerry, Aki Yokoyama",
    "Published: June 12, 2018",
    "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.",
    "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:",
    "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.",
    "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.",
    "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.",
    "Market tightening combined with international dollar balance sheet vulnerabilities could trigger funding problems under market strains.",
    "Possible dynamics under stress:",
    "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:",
    "Central banks’ swap lines, already in place to provide foreign exchange liquidity in times of stress, should be maintained as a last resort backstop.",
    "[https://www.imf.org/wp-content/uploads/2018/06/eng-may-22-dollar-funding1-4.png](https://www.imf.org/wp-content/uploads/2018/06/eng-may-22-dollar-funding1-4.png)",
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