Dollar funding and the lending behavior of global banks
AbstractA large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing their funding to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-74.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Victoria Ivashina & David S. Scharfstein & Jeremy C. Stein, 2012. "Dollar Funding and the Lending Behavior of Global Banks," NBER Working Papers 18528, National Bureau of Economic Research, Inc.
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
- F6 - International Economics - - Economic Impacts of Globalization
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-22 (All new papers)
- NEP-BAN-2012-12-22 (Banking)
- NEP-EEC-2012-12-22 (European Economics)
- NEP-MON-2012-12-22 (Monetary Economics)
- NEP-OPM-2012-12-22 (Open Economy Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nicola Cetorelli & Linda S. Goldberg, 2011.
"Liquidity management of U.S. global banks: Internal capital markets in the great recession,"
NBER Working Papers
17355, National Bureau of Economic Research, Inc.
- Cetorelli, Nicola & Goldberg, Linda S., 2012. "Liquidity management of U.S. global banks: Internal capital markets in the great recession," Journal of International Economics, Elsevier, vol. 88(2), pages 299-311.
- Nicola Cetorelli & Linda S. Goldberg, 2011. "Liquidity Management of U.S. Global Banks: Internal Capital Markets in the Great Recession," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
- Nicola Cetorelli & Linda Goldberg, 2011. "Liquidity management of U.S. global banks: internal capital markets in the Great Recession," Staff Reports 511, Federal Reserve Bank of New York.
- Akram, Qaisar Farooq & Rime, Dagfinn & Sarno, Lucio, 2008.
"Arbitrage in the Foreign Exchange Market: Turning on the Microscope,"
CEPR Discussion Papers
6878, C.E.P.R. Discussion Papers.
- Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
- Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2006. "Arbitrage in the Foreign Exchange Market: Turning on the Microscope," SIFR Research Report Series 42, Institute for Financial Research.
- Q. Farooq Akram, & Dagfinn Rime & Lucio Sarno, 2005. "Arbitrage in the foreign exchange market: Turning on the microscope," Working Paper 2005/12, Norges Bank.
- Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan, vol. 60(2), pages 155-192, July.
- Becker, Bo & Ivashina, Victoria, 2014.
"Cyclicality of credit supply: Firm level evidence,"
Journal of Monetary Economics,
Elsevier, vol. 62(C), pages 76-93.
- Tommaso Mancini Griffoli & Angelo Ranaldo, 2010.
"Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity,"
2010-14, Swiss National Bank.
- Mancini Griffoli, Tommaso & Ranaldo, Angelo, 2012. "Limits to Arbitrage during the Crisis: Finding Liquidity Constraints and Covered Interest Parity," Working Papers on Finance 1212, University of St. Gallen, School of Finance.
- Chava, Sudheer & Purnanandam, Amiyatosh, 2011.
"The effect of banking crisis on bank-dependent borrowers,"
Journal of Financial Economics,
Elsevier, vol. 99(1), pages 116-135, January.
- Sudheer Chava & Amiyatosh Purnanandam, 2006. "The effect of a banking crisis on bank-dependent borrowers," Proceedings 1030, Federal Reserve Bank of Chicago.
- Ingo Fender & Patrick McGuire, 2010. "Bank structure, funding risk and the transmission of shocks across countries: concepts and measurement," BIS Quarterly Review, Bank for International Settlements, September.
- Niall Coffey & Warren B. Hrung & Asani Sarkar, 2009. "Capital constraints, counterparty risk, and deviations from covered interest rate parity," Staff Reports 393, Federal Reserve Bank of New York.
- Richard M. Levich, 2012. "FX Counterparty Risk and Trading Activity in Currency Forward and Futures Markets," NBER Working Papers 18256, National Bureau of Economic Research, Inc.
- Nicolae G�rleanu & Lasse Heje Pedersen, 2011.
"Margin-based Asset Pricing and Deviations from the Law of One Price,"
Review of Financial Studies,
Society for Financial Studies, vol. 24(6), pages 1980-2022.
- Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Margin-Based Asset Pricing and Deviations from the Law of One Price," NBER Working Papers 16777, National Bureau of Economic Research, Inc.
- Levich, Richard M., 2012. "FX counterparty risk and trading activity in currency forward and futures markets," Review of Financial Economics, Elsevier, vol. 21(3), pages 102-110.
- TÃ¼mer Kapan & Camelia Minoiu, 2013.
"Balance Sheet Strength and Bank Lending During the Global Financial Crisis,"
IMF Working Papers
13/102, International Monetary Fund.
- Kapan, Tümer & Minoiu, Camelia, 2013. "Balance sheet strength and bank lending during the global financial crisis," Discussion Papers 33/2013, Deutsche Bundesbank, Research Centre.
- Viral V. Acharya & Sascha Steffen, 2013. "The “Greatest” Carry Trade Ever? Understanding Eurozone Bank Risks," NBER Working Papers 19039, National Bureau of Economic Research, Inc.
- Philip Lane & Peter McQuade, 2013.
"Domestic Credit Growth and International Capital Flows,"
The Institute for International Integration Studies Discussion Paper Series
- Lane, Philip R. & McQuade, Peter, 2013. "Domestic credit growth and international capital flows," Working Paper Series 1566, European Central Bank.
- Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series iiisdp438, IIIS.
- Acharya, Viral V & Afonso, Gara & Kovner, Anna, 2013.
"How do Global Banks Scramble for Liquidity? Evidence from the Asset-Backed Commercial Paper Freeze of 2007,"
CEPR Discussion Papers
9457, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Gara Afonso & Anna Kovner, 2013. "How do global banks scramble for liquidity? Evidence from the asset-backed commercial paper freeze of 2007," Staff Reports 623, Federal Reserve Bank of New York.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.