Dollar Funding Risks for Foreign Banks Elude Easy Explanation

(Bloomberg) -- Non-U.S. banks have amassed dollar-denominated liabilities that are about as big as they were during the global financial crisis. Yet changes to how they obtain dollars make it hard to tell if funding risks have increased or lessened.

Foreign institutions from Europe to the Asia-Pacific and the Americas have boosted the proportion of dollar funding they do in their home countries rather than through U.S.-based branches and subsidiaries, according to a paper from the Bank of International Settlements released as part of its quarterly review. At the same time though, cross-border flows account for just over half of their dollar liabilities and U.S. residents provide a bigger share of dollar funding than is actually raised in America, it says.

While that large share from U.S. residents could “alleviate potential funding risks to some extent” and the ability to raise greenbacks in other places “can prove stabilizing” at times of instability in U.S. markets, the paper notes that “cross-border funding, regardless of the source, may be fickle in a crisis,” as the upheaval of a decade ago showed.

“It is not clear-cut whether the current geography of dollar funding implies that the funding risks which characterized the dollar shortage around the GFC have increased or decreased,” wrote Inaki Aldasoro and Torsten Ehlers from the BIS. They noted that dollar liabilities of non-American lenders are around as large as they were during the global financial crisis and that “the sheer size and complexity of non-U.S. banks’ dollar liabilities warrants attention.”

Other Notable Takeaways

• Non-U.S. banks’ on-balance sheet U.S. dollar liabilities have increased steadily, from $10.6 trillion at end-2009 to $12.8 trillion at end-June 2018
• While available data don’t allow for measurement of off-balance sheet FX derivatives such as swaps for dollar funding, BIS paper estimates total dollar liabilities were around $14 trillion at the end of June
• For European banks, the amount of dollar liabilities booked at home in absolute amounts has been “relatively flat,” although the proportion has increased
• For banks outside Europe and the U.S., the absolute amount of dollar liabilities has increased, largely due to Canadian and Japanese lenders
• Since 2015 the share of dollar liabilities booked in the U.S. has been declining for both European and non-European banks
• The share of U.S. dollar liabilities of non-U.S. banks that was cross-border was around 51% at end-June 2018, implying that the location where U.S. dollar funding is raised is different from the location of the funding provider
• Monitoring developments is complicated by data gaps, such as the lack of consistent information on off-balance sheet derivatives and on the geographic and sectoral distribution of holdings of international debt securities

To contact the reporters on this story: Alexandra Harris in New York at aharris48@bloomberg.net;Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Greg Chang

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