Global Banks’ Dollar Funding: A Source of Financial Vulnerability

IMF Working Papers, July 3, 2020

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Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets.
Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis.
Shocks to US dollar funding costs lead to financial stress in the home economies of global non-US banks.
These shocks cause spillovers to borrowers, especially emerging economies.
US dollar funding vulnerability amplifies negative effects on home economies and borrowers.
Policy-related factors that mitigate these effects include:
- swap line arrangements between central banks; and
- international reserve holdings.

Transmission channel: US dollar funding costs increase funding pressures for global non-US banks, which in turn translate into financial stress in banks’ home economies and tighter conditions for borrowers.
Amplification: jurisdictions or institutions exhibiting higher US dollar funding vulnerability experience stronger adverse impacts from identical dollar funding shocks.
Mitigants: central bank swap lines and higher international reserves reduce the transmission and severity of stress stemming from US dollar funding shocks.

Monitor US dollar funding exposures and vulnerabilities across global non-US banks and home economies.
Where possible, control vulnerabilities through policy tools and international coordination.
Strengthen and consider the role of central bank swap line arrangements and international reserve accumulation as buffers against dollar funding shocks.
Continue post-crisis regulatory efforts to bolster banking system resilience to cross-border dollar funding stresses.