The US Dollar Shortage in Global Banking
B.I.S Paper by Patrick McGuire and Goetz von Peter
Abstract:
Understanding the global financial crisis and the stresses on bank balance sheets requires a perspective on banks’ international investment positions and how these positions were funded across currencies and counterparties. This special feature uses the BIS international banking statistics to identify the cross-currency and counterparty funding patterns for the largest banking systems, and to assess the causes of the US dollar shortage during the critical phases of the crisis.
Concluding remarks:
The crisis has shown how unstable banks’ sources of funding can become. Yet the globalisation of banks over the past decade and the increasing complexity of their balance sheets have made it harder to construct measures of funding vulnerabilities that take into account currency and maturity mismatches. This special feature has shown how the BIS banking statistics can be combined to provide measures of banks’ funding positions on a consolidated balance sheet basis. The analysis suggests that many European banking systems built up long US dollar positions vis-à-vis non-banks and funded them by interbank borrowing and via FX swaps, exposing them to funding risk. When heightened credit risk concerns crippled these sources of short-term funding, the chronic US dollar funding needs became acute. The resulting stresses on banks’ balance sheets have persisted, resulting in tighter credit standards and reduced lending as banks struggle to repair their balance sheets.
Related:
Dollar
US dollar money market funds and non-US banks