FX funding shocks and cross-border lending: fragmentation matters

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 26 October 2018

Staff Working Paper No. 762

By Fernando Eguren-Martin, Matias Ossandon Busch and Dennis Reinhardt

This paper provides novel empirical evidence on the existence of a cross-border bank lending channel arising from funding shocks in FX swap markets (‘CIP deviations’). Using balance sheet data from UK banks we show that when the cost of obtaining funds in a particular foreign currency increases, banks reduce the supply of cross-border credit in that currency. Notably, this effect is increasing in the degree of banks’ reliance on swap-based FX funding. Fragmentation in funding markets appears to play an important role: we find that high access to foreign FX funding in general, and to internal capital markets in particular, shields banks’ cross-border FX lending supply from the described channel.

PDFFX funding shocks and cross-border lending: fragmentation matters

Was this page useful?
Add your details...