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Global Bank Lending and Exchange Rates

Author

Listed:
  • Jonas Becker
  • Maik Schmeling
  • Andreas Schrimpf

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.

Suggested Citation

  • Jonas Becker & Maik Schmeling & Andreas Schrimpf, 2024. "Global Bank Lending and Exchange Rates," BIS Working Papers 1161, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1161
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    References listed on IDEAS

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    More about this item

    Keywords

    cross-currency lending; exchange rates; granular instrumental variable; CIP deviation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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