Global banks and synthetic funding: the benefits of foreign relatives

This paper provides novel empirical evidence on the effect of dislocations in FX swap markets (‘CIP deviations’) on bank lending. Using balance sheet data from UK banks we show that when the cost of obtaining swap-based funds in a particular foreign currency increases, banks reduce the supply of cross-border credit in that currency. This effect is increasing in the degree of banks’ reliance on swap-based FX funding. Notably, high access to alternative funding sources of (on balance sheet) FX funding shield banks’ cross-border FX lending supply from the described channel, but only if such access occurs via internal capital markets. There is evidence of some degree of substitution from banks outside the UK which are not affected by changes in the cost of accessing dollars or euros synthetically.