Funding structures and resilience to shocks after a decade of regulatory reform

Kristin Forbes, Christian Friedrich and Dennis Reinhardt

Recent episodes of financial stress, including the ‘dash for cash’ at the onset of the Covid-19 (Covid) pandemic, pressure in the UK’s liability-driven investment funds in 2022, and the collapse of Silicon Valley Bank in 2023, were stark reminders of the vulnerability of financial institutions to shocks that disrupt liquidity and access to funding. This post explores how the funding choices of banking systems and corporates affected their resilience during the early stages of Covid and whether subsequent policy actions were effective at mitigating financial stress. The results suggest that policy responses targeting specific structural vulnerabilities were successful at reducing financial stress.

Continue reading →

Jump-starting an international currency

Saleem Bahaj and Ricardo Reis

Only a handful of currencies are regularly used for cross-border payments: the euro, the yen, the pound, the yuan and, of course, the US dollar, which dominates almost any measure of international use. But how does a currency achieve an international status in the first place? And which government policies assist in that jump-start? Economic theory and the rise of the renminbi (RMB) in the last decade offer some clues.

Continue reading →

Covid-19 briefing: cross-border dollar funding

Saleem Bahaj and Fernando Eguren-Martin

The US dollar has a dominant role in the international financial system. The fact that trade and cross-border investment are overwhelmingly dollar-denominated means that non-US banks are heavily reliant on dollar funding (Aldasoro and Ehlers (2018)). This funding dried up during the Covid-19 epidemic, prompting the use of central bank swap lines as a policy response. This post looks at recent research on why dollar funding dried up in March, the efficacy of swap lines and the implications for cross-border banking, exchange rates and the international financial system.

Continue reading →