Dollar funding and the lending behavior of global banks

By Victoria Ivashina, D. Scharfstein, Jeremy C. Stein. 2012

342 citations recorded by the source corpus.

A 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 the funding provided 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.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/c1a50b2de82817e75466df4baeed9defc3bedfba

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Citations in the corpus

U.S. monetary policy and emerging market credit cycles (2017, neutral): “Discussion of heavy reliance on dollar credit in developed markets can be found in Ivashina, Scharfstein, and Stein (2015) and ECB (2016).”
Domestic Credit Growth and International Capital Flows (2013, neutral): “…international capital flows and domestic credit growth should incorporate the central intermediation role played by global banking groups, building on the interesting recent contributions by Cetorelli and Goldberg (2011, 2012), Ivashina et al (2012), Bruno and Shin (2013) and Niepmann (2013).”
Banking, Trade, and the Making of a Dominant Currency* (2020, background): “Gourinchas and Rey (2007) dene the concept more broadly, to also capture the fact that the U.”
The U.S. Treasury Premium (2017, neutral): “…is defined as the size of the failure of CIP between government bond yields, it also relates to the recent literature studying CIP deviations focusing on behaviors of banks and corporate issuers (such as Ivashina et al. (2015), Liao (2016), Du et al. (Forthcoming), and Avdjiev et al. (2016)).”