BIS: US dollar funding markets during the Covid-19 crisis – the international dimension

  • Dislocations in domestic US dollar money markets reverberated globally. Non-US banks lost a substantial part of funding from money market funds and had to borrow at shorter maturities.
  • Nevertheless, the severity of dollar funding strains varied substantially across banks, and eased for banks from jurisdictions with standing swap lines with the Federal Reserve.
  • The impact of policy measures to quell the stress was felt unevenly across different funding markets. The divergence between key rates resulted in an unusual divergence of funding cost metrics, with some indicating a “dollar glut” while others a “dollar shortage”.

Dislocations in core US dollar funding markets in March and April 2020 reverberated through the balance sheets of global banks. One important catalyst was the stress in the markets for commercial paper (CP) and certificates of deposits (CDs), debt instruments issued by banks to source funding from non-bank investors such as money market funds (MMFs). Non-US banks lacking access to insured retail dollar deposits are particularly dependent on this type of funding to finance dollar assets. Hence, during the earlier phases of the crisis, non-US banks were especially hit by the decline in both the volumes and maturities of CP/CD funding, when prime MMFs withdrew as marginal buyers of CP/CD after facing large outflows.

Disruptions in these core funding markets spilled over globally, contributing to wide swings in “offshore” US dollar funding costs, as indicated, for instance, by the cross-currency basis. A number of policy measures helped to stabilise short-term dollar funding markets, but markets for different instruments normalised at different speeds. This opened up a wedge in funding conditions across key market segments. For example, funding stresses quickly eased for banks in jurisdictions with standing swap lines with the Federal Reserve. In such cases, dollar liquidity operations in March allowed the banks to access dollar funding cheaply and easily. This was also reflected in the diverging funding costs paid by these banks in CP/CD markets, which were lower compared with others (without such access or banks that benefited from the expanded dollar liquidity operations only later, in April).

This Bulletin from the Bank for International Settlements focuses on the developments in FX swap markets and the divergence in key US dollar funding rates during the Covid-19 crisis, and focuses primarily on the pull-back of funding from non-US banks and the associated international spillover effects. It shows that key dollar funding rates – which usually track each other closely – diverged markedly during this episode, and that the funding costs for market participants reliant on MMF funding varied greatly between banks, even for institutions of comparable creditworthiness.

Read the full bulletin

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