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The US dollar shortage in global banking and the international policy response

Author Info

Listed author(s):
  • Patrick McGuire
  • Goetz von Peter

Abstract

Among the policy responses to the global financial crisis, the international provision of US dollars via central bank swap lines stands out. This paper studies the build-up of stresses on banks' balance sheets that led to this coordinated policy response. Using the BIS international banking statistics, we reconstruct the worldwide consolidated balance sheets of the major national banking systems. This allows us to investigate the structure of banks' global operations across their offices in various countries, shedding light on how their international asset positions are funded across currencies and counterparties. The analysis first highlights why a country's "national balance sheet", a residency-based measure, can be a misleading guide to where the vulnerabilities faced by that country's national banking system (or residents) lie. It then focuses on banking systems' consolidated balance sheets, and shows how the growth (since 2000) in European and Japanese banks' US dollar assets produced structural US dollar funding requirements, setting the stage for the dollar shortage when interbank and swap markets became impaired.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 291.

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Length: 32 pages
Date of creation: Oct 2009
Handle: RePEc:bis:biswps:291
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Keywords: international banking; financial crises; funding risk; US dollar shortage; central bank swap lines;

This paper has been announced in the following NEP Reports:

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  1. Raghuram G. Rajan & Ioannis Tokatlidis, 2005. "Dollar Shortages and Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
  2. John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
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  8. Flannery, Mark J & James, Christopher M, 1984. "Market Evidence on the Effective Maturity of Bank Assets and Liabilities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 435-445, November.
  9. Anna J. Schwartz, 1999. "Is There a Need for an International Lender of Last Resort?," Cato Journal, Cato Journal, Cato Institute, vol. 19(1), pages 1-6, Spring/Su.
  10. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
  11. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  12. Olivier Jeanne & Charles Wyplosz, 2003. "The International Lender of Last Resort. How Large Is Large Enough?," NBER Chapters,in: Managing Currency Crises in Emerging Markets, pages 89-124 National Bureau of Economic Research, Inc.
  13. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  14. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
  15. Mitsuhiro Fukao, 1991. "Exchange Rate Movements and Capital-Asset Ratio of Banks: On the Conept of Structural Positions," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 9(2), pages 91-104, September.
  16. Capie, Forrest, 1998. "Can There Be an International Lender-of-Last Resort?," International Finance, Wiley Blackwell, vol. 1(2), pages 311-325, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Global Finance Requires More Global Cooperation
    by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-02-15 12:20:03
  2. Rewriting the textbook: covered interest parity
    by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-10-17 12:50:11
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