Template-Type: ReDIF-Paper 1.0
Author-Name: Jonas Becker
Author-X-Name-First: Jonas
Author-X-Name-Last: Becker
Author-Name: Maik Schmeling
Author-X-Name-First: Maik
Author-X-Name-Last: Schmeling
Author-Name: Andreas Schrimpf
Author-X-Name-First: Andreas
Author-X-Name-Last: Schrimpf
Title: Global Bank Lending and Exchange Rates
Abstract: We estimate the impact of banks' cross-currency lending on exchange rates to shed light on the importance of flows as a major force affecting FX market outcomes. When non-US banks extend more loans in US dollars (USD) relative to US banks  originating foreign currency-denominated loans, the USD appreciates significantly. When a foreign bank grants a cross-currency USD loan, it needs to obtain USD liquidity which puts pressure on funding markets and leads to an appreciation of USD. This effect – which we estimate via a granular instrumental variable approach – has greatly intensified since the global financial crisis and crucially depends on how banks fund the provision of cross-currency loans. In line with this mechanism, we show that cross-currency lending also affects the FX swap market (and deviations from covered interest parity), as well as other segments of the US short-term funding market.
Creation-Date: 2024-01
File-URL: https://www.bis.org/publ/work1161.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1161.htm
File-Format: text/html
Number: 1161
Keywords: cross-currency lending, exchange rates, granular instrumental variable, CIP deviation
Classification-JEL: F31, E44, G21
Handle: RePEc:bis:biswps:1161