Dollar funding and housing markets: the role of non-US global banks
Summary
Focus
House prices co-move considerably across countries. Understanding international house price synchronisation is highly policy-relevant. In most countries, housing wealth represents the largest component of household wealth and is the single most important collateralisable asset. We show that non-US global banks and their exposure to US dollar funding conditions help explain the international synchronisation of house prices.
Contribution
Our results identify a new international spillover channel of US dollar funding conditions. Because it works through heterogeneous dollar funding exposures among creditors, this new channel is not linked to common lender exposures or to currency mismatches on borrower countries' balance sheets typically associated with the financial channel of the exchange rate. We capture this by introducing the concept of dollar co-dependence, which refers to a borrowing country pair's joint exposure to US dollar funding conditions via their non-US creditor banks. We use a granular instrumental variable approach to study synchronisation between economic variables.
Findings
When the dollar appreciates, mortgage lending and house prices decrease more in borrower countries whose non-US creditor banks are more exposed to dollar funding conditions. As US dollar funding conditions vary, borrowing country pairs with higher joint exposure to US dollar funding conditions via their non-US creditor banks (higher dollar co-dependence) exhibit a higher synchronisation of mortgage credit and house price growth. We show theoretically, with a simple value-at-risk model, as well as empirically that the exposure of non-US global banks to dollar funding conditions is captured by the bilateral treasury basis between the currency of the non-US global creditor banks' nationality and the US dollar.
Abstract
House prices co-move considerably across countries. We show how non-US global banks and their exposure to US dollar funding conditions help explain this comovement. When the dollar appreciates, mortgage lending and house prices decrease more in borrower countries whose non-US creditor banks are more exposed to dollar funding conditions. As US dollar funding conditions vary, borrowing country pairs with higher joint exposure to US dollar funding conditions via their non-US creditor banks exhibit a higher synchronization of mortgage credit and house price growth. We capture the exposure to dollar funding conditions by the bilateral treasury basis between the currency of the non-US global creditor banks' nationality and the US dollar, a choice that we motivate in a simple value-at-risk model. Our results identify a novel international spillover channel of US dollar funding conditions. Because it works through heterogenous dollar funding exposures among creditors, this new channel is neither linked to common-lender exposures nor to currency mismatches on borrower countries' balance sheets, typically associated with the financial channel of the exchange-rate.
JEL Classification: F34, F36, G15, G21
Keywords: house prices, synchronization, US dollar funding, dollar cycle, US treasury basis, convenience yield, capital flows, global banks, global banking network