The geography of dollar funding of non-US banks

Key Takeaways

• US dollar liabilities of non-US banks grew after the Great Financial Crisis (GFC). At end-June 2018, they stood at $12.8 trillion ($14.0 trillion including net off-balance sheet positions) - as large as at the peak of the GFC.
• Banks raise relatively fewer dollar liabilities in their affiliates in the US since the GFC. This is due to a rise in the share of dollar liabilities booked in the country where banks are headquartered.
• European banks, which traditionally have had a large US footprint, have shrunk their dollar business and the role of their US affiliates since the GFC. At the same time, non-European banks expanded their dollar borrowing quite rapidly, but in recent years have also raised relatively fewer dollars in the US.
• A large share of US dollar liabilities of non-US banks are cross-border (51% at end-June 2018), implying that the location where US dollar funding is raised is different from the location of the funding provider.
• The global share of US dollar funding provided by US residents is significantly higher than that raised at foreign banks' US branches and subsidiaries, though these shares vary across banking systems.

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Conclusion

• Non-US banks have very large US dollar liabilities - similar in magnitude to those they had in 2007-08 when markets started to face a dollar squeeze (McGuire and von Peter (2012)). The share of dollar funding raised in the United States by non-US banks' branches and subsidiaries has declined. Yet a significantly larger share of dollar liabilities is nonetheless provided by US residents, by way of cross-border flows.
• How might this funding configuration behave in times of market stress? Non-US creditors may be pressured to withdraw funding as they might face a dollar funding squeeze themselves. The fact that a large share of dollars is provided by US residents, who are less likely to face dollar liquidity problems, may therefore alleviate potential funding risks to some extent. On the other hand, the ability to raise dollar funding outside the United States can prove stabilising in a situation where funding conditions in the US become more difficult, as evidenced by the adjustment of non-US banks to the 2016 US money market fund reform (Aldasoro et al (2017)).
• The high cross-border share of dollar funding and the increased centralisation of funding by non-US banks at their headquarters highlight the importance of the stability of cross-border flows. Cross-border funding, regardless of the source, may be fickle in a crisis, as the GFC demonstrated (Borio et al (2011)). This is especially true when funding sources are concentrated geographically. It also points to the importance of policy instruments that allow the official sector to provide dollar liquidity in a crisis, such as central bank swap lines (BIS (2014), Mehrling (2015)).
• These considerations suggest that it is not clear-cut whether the current geography of dollar funding implies that the funding risks which characterised the dollar shortage around the GFC have increased or decreased. Aspects not discussed here, such as the rise of collateralised borrowing, will also be relevant. Monitoring these developments is complicated by data gaps, such as the lack of consistent information on off-balance sheet derivatives and on the geographic and sectoral distribution of holdings of international debt securities. In any event, the sheer size and complexity of non-US banks' dollar liabilities warrants attention (BIS (2017)).

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