US dollar funding and foreign banking offices outside the United States

With US dollar funding central to much of the international banking system, dollar funding shortages can be destabilising for banks (Barajas et al (2020)). As the pattern of funding sources has been changing for banks outside the United States, their susceptibility to dollar funding shocks may also have undergone changes. This box highlights how the role of cross-border and inter-office (ie from related banks) funding in US dollars has changed for banks outside the United States. It also relates such changes to the relative presence of foreign banking offices (FBOs, subsidiaries or branches whose parent is in another country) and domestic banking offices (DBOs, those located in their country of headquarters).

There is a distinct change in the location of banks' US dollar funding sources. The share of cross-border sources fell from 74% in Q1 2015 to 72% in Q4 2021 (Graph A, left-hand panel). Over the same period, the share of cross-border US dollar funds that banks sourced inter-office fell from 33% to 29%.

A relative retreat of FBOs from local banking systems has driven these developments. With the decline in global banking as a business model, banking groups do more business from their home office rather than through their foreign affiliates (Aldasoro and Ehlers (2018)). A number of consequences follow from such structural shifts. FBOs typically obtain a higher proportion of funding from cross-border, especially inter-office, sources than do DBOs. However, the share of FBOs in the US dollar funding of local banking systems has been falling, from 40% in Q1 2015 to 36% in Q4 2021 for cross-border sources and from 30% to 24% over the same period for local sources (Graph A, centre panel). This shifted the US dollar funding mix of the local banking system, reallocating it away from DBOs' inter-office sources and FBOs' unrelated cross-border funding sources (right-hand panel). In advanced economies, this was compensated for largely by DBOs' borrowing from unrelated sources; in emerging market economies, by local DBO funding.

The views expressed are those of the authors and not necessarily those of the Bank for International Settlements.