US dollar funding: an international perspective
Committee on the Global Financial System
The US dollar dominates international finance as a funding and investment currency. Although the United States accounts for one quarter of global economic activity, around half of all cross-border bank loans and international debt securities are denominated in US dollars. Deep and liquid US dollar markets are attractive to non-US entities because they provide borrowers and lenders access to a large set of counterparties. The pre-eminence of the US dollar as the global reserve currency and in trade invoicing further motivates its international use.
The widespread use of a dominant currency for funding gives rise to a complex and geographically dispersed network of relationships. This has important implications for the resilience of the global financial system. Specifically, the central role of the US dollar in international finance means that global economic and financial activity is highly dependent on the ability of US dollar funding to flow smoothly and efficiently between users. This broad international use of the US dollar generates significant benefits to the global financial system. These benefits arise from economies of scale and network effects, which reduce the costs of transferring capital and risks around the financial system. But it can also lead to vulnerabilities, as the resulting interconnectedness can transmit and amplify shocks that emanate from the United States or elsewhere in US dollar funding markets, across the globe.
This report seeks to understand better the role of US dollar funding in the global financial system by: (i) taking stock of its structure and evolution since the global financial crisis (GFC); (ii) assessing its resilience and highlighting its potential vulnerabilities; and (iii) identifying implications for policy. The scope of the report is limited to US dollar borrowing, lending and intermediation by non-US entities with each other and with US entities. The bulk of the work reported here was concluded prior to the outbreak of Covid-19. The ensuing crisis validated many of the messages from the analysis, but at the same time had an important impact on US dollar funding activity. The final section of the report provides some pertinent, albeit necessarily preliminary, observations in this regard.
The report identifies regulatory and structural policy options that could further reduce certain vulnerabilities. For example, in time, regulators of non-bank financial institutions could provide guidance on the inclusion of a currency dimension in their liquidity risk management. Some jurisdictions could consider policies aimed at deepening domestic capital markets. Further thought might be given to improving safety nets that can cushion the negative impact when US dollar-related risks crystallise – for example, through increased self-insurance or increased bilateral, regional or global liquidity support mechanisms, although all these options present governance and policy challenges.
The full Committee on the Global Financial System report is available at https://www.bis.org/publ/cgfs65.pdf