Global Banks, Dollar Funding, and Regulation

Revised version, May 2019

BIS Working Papers  |  No 708  | 
22 March 2018
PDF full text
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 |  92 pages

Summary

Focus

Non-US banks collectively hold $12.6 trillion of dollar-denominated assets - almost as much as US banks. Since the Great Financial Crisis (GFC) and the eurozone crisis, however, there has been a stark divergence between European and Japanese banks' business models. We study the impact of this divergence on pricing of dollar funding and dollar funding networks. We use transaction-level data from the regulatory filings of US money market funds (MMFs) as well as quarterly regulatory filings of US branches and agencies of foreign banks, and BIS international banking statistics to develop a rich picture of the dollar funding landscape.

Contribution

Dollar funding stress of non-US banks was at the center of the GFC. The dollar funding landscape has changed dramatically since then, owing to the shifts in demand and differential implementation of Basel III regulations across jurisdictions. Our research shows how the demand for dollar funding has changed, how global banks obtain dollar funding and differential funding cost across banks for different funding instruments. This information is crucial in case of a new surge in dollar funding stress.

Findings

We find that Japanese banks pay a premium in their repurchase agreements ("repos") with US MMFs. We show that the bargaining power of MMFs fund families, together with the particular demand for long term funding of Japanese banks, help explain this premium. Our findings point to the existence of dollar funding networks. We derive implications from the existence of these networks and provide supporting evidence for them. Finally, we also show that disruptions in dollar repo markets spill over to other important dollar funding markets, such as that of foreign exchange swaps.

 

Abstract

We document that non-US global banks are increasingly heterogeneous in their dollar banking activities and dollar demand. We study the implications for dollar funding markets using data on security-level money market fund holdings. We find that funds charge higher prices to banks with weaker bargaining positions, consistent with theories of over-the-counter markets. For identification, we use exogenous variation in bargaining power due to window-dressing at quarter-ends and the US money market fund reform. We show that post-crisis regulations have reduced competition in certain segments of dollar funding markets and have generated incentives for regulatory arbitrage, with potentially adverse unintended consequences.

JEL classification: G15, F30, G21, G28

Keywords: global banks, dollar funding, money market funds, relationship frictions, US Money Market Fund reform