October 11, 2019 / 2:21 PM / 3 days ago

Non-U.S. banks still vulnerable to dollar funding shocks, IMF warns

WASHINGTON (Reuters) - Despite measures introduced following the 2007-2009 financial crisis to strengthen the global banking system, non-U.S. banks remain vulnerable to a disruption in the U.S. dollar funding market, the International Monetary Fund warned on Friday.

FILE PHOTO: A sign of U.S. dollar is seen at a currency exchange store in Shanghai, China August 8, 2019. REUTERS/Aly Song

The IMF pointed to the fact non-U.S. banks’ dollar assets are rising and remain comparable to their pre-crisis levels, while the currency funding gap between their dollar-denominated assets and liabilities has actually grown since 2008.

Because non-U.S. banks, unlike domestic banks, have limited access to a stable base of dollar deposits, they are more reliant on short-term and potentially more volatile sources of funding, such as commercial paper and loans from other banks.

As these funding markets dried up during the financial crisis, non-U.S. banks experienced a dollar funding crunch. That prompted the U.S. Federal Reserve to provide more than $500 billion in emergency funds to overseas central banks, which then lent those funds on to their domestic banks.

Regulators including the Fed have since introduced a slew of capital, liquidity, and risk management rule changes that aim to prevent foreign lenders turning to the central bank for emergency liquidity.

But in chapter five of its bi-annual Global Financial Stability Report, released on Friday, the IMF said non-U.S. banks continue to play a major role in dollar lending globally. It found non-U.S. banks’ dollar assets had risen to $12.4 trillion by mid-2018 from $9.7 trillion in 2012, and remain comparable to pre-crisis levels relative to their total assets.

The Fund also found that the gap between non-U.S. banks’ dollar-denominated assets and liabilities has widened to about $1.4 trillion, or 13% of assets, as of early 2018, from 10% of assets in mid-2008.

“Thus, increasing U.S. dollar activity has gone hand in hand with a widening gap between U.S. dollar–denominated assets and liabilities, potentially making home economies more vulnerable to shocks arising in U.S. dollar funding markets,” IMF researchers wrote.

Non-U.S. banks’ ability to fund their dollar assets over a long time horizon from stable sources, known as the U.S. dollar stable funding ratio, has improved only moderately since 2008, they said. Non-U.S. banks’ highly liquid dollar assets, which can be sold quickly in times of stress, also have improved, they noted.

Worries over a potential crunch in the U.S. dollar funding market were sparked last month when repurchase agreements and other money market rates soared to levels not seen since the height of the global financial crisis in 2008.

The IMF will release its entire Global Financial Stability Report next week.

Reporting by Michelle Price; Editing by Andrea Ricci

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