Staff Working Paper No. 762
By Fernando Eguren-Martin, Matias Ossandon Busch and Dennis Reinhardt
This paper provides novel empirical evidence on the effect of dislocations in FX swap markets (‘CIP deviations’) on bank lending. Using balance sheet data from UK banks we show that when the cost of obtaining swap-based funds in a particular foreign currency increases, banks reduce the supply of cross-border credit in that currency. This effect is increasing in the degree of banks’ reliance on swap-based FX funding. Notably, high access to alternative funding sources of (on balance sheet) FX funding shield banks’ cross-border FX lending supply from the described channel, but only if such access occurs via internal capital markets. There is evidence of some degree of substitution from banks outside the UK which are not affected by changes in the cost of accessing dollars or euros synthetically.
This version was updated in September 2019. The Staff Working Paper was first published on 26 October 2018 under the title ‘FX funding shocks and cross-border lending: fragmentation matters’.
This is an online appendix to Staff Working Paper No. 762.