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Granular Banking Flows and Exchange-Rate Dynamics

Author

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  • Bippus, B.
  • Lloyd, S.
  • Ostry, D.

Abstract

Using data on the external positions of global banks in the world's largest banking hub, the UK, and a granular international-banking model, we show that large banks' idiosyncratic net flows into USD debt influence exchange-rate dynamics. UK-resident banks' USD demand is, on average, price-elastic, whereas their counterparties' USD supply is price-inelastic. We document a structural shift—from banks' being price-inelastic before the Global Financial Crisis to price-elastic afterwards—linked to a marked rise in banks' hedging on-balance-sheet USD net exposures via FX derivatives. This change may help explain the tighter link between exchange rates and macroeconomic fundamentals since the crisis.

Suggested Citation

  • Bippus, B. & Lloyd, S. & Ostry, D., 2026. "Granular Banking Flows and Exchange-Rate Dynamics," Cambridge Working Papers in Economics 2359, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2359
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    References listed on IDEAS

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    2. Jonas Becker & Maik Schmeling & Andreas Schrimpf, 2024. "Global Bank Lending and Exchange Rates," BIS Working Papers 1161, Bank for International Settlements.
    3. Correa, Ricardo & DeMarco, Laurie, 2025. "Dealer leverage and exchange rates: Heterogeneity across intermediaries," Journal of Banking & Finance, Elsevier, vol. 174(C).
    4. Kwak, Jun Hee & Han, Bada & Lee, Jae Young, 2025. "The causal effects of equity flows: Evidence from Korea," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 102(C).

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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