Staff Working Paper No. 1,043
By Balduin Bippus, Simon Lloyd and Daniel Ostry
Using data on the external positions of global banks in the world’s largest banking hub, the UK, and a granular international-banking model, we show that large banks’ idiosyncratic net flows into USD debt influence exchange-rate dynamics. UK-resident banks’ USD demand is, on average, price-elastic, whereas their counterparties’ USD supply is price-inelastic. We document a structural shift − from banks’ being price-inelastic before the global financial crisis to price-elastic afterwards − linked to a marked rise in banks’ hedging on-balance-sheet USD net exposures via FX derivatives. This change may help explain the tighter link between exchange rates and macroeconomic fundamentals since the crisis.
This version was updated in March 2026.
Granular banking flows and exchange-rate dynamics