## Global Banks’ Dollar Funding: A Source of Financial Vulnerability

_IMF Working Papers, July 3, 2020_

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## Bibliographic details
- Authors: Adolfo Barajas, Andrea Deghi, Claudio Raddatz, Peichu Xie, Yizhi Xu
- Published: July 3, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513549149.001

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### Key findings
- 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.

### Analysis and mechanisms
- 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.

### Policy implications and recommendations
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2020/07/03/global-banks-dollar-funding-a-source-of-financial-vulnerability-49529_