-
Global Bank Lending and Exchange Rates
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 foreign exchange (FX) market outcomes. To rationalise our findings, we focus on the funding mechanism for how globally active banks source liquidity when granting loans in another currency such as the US dollar. When a foreign bank grants a cross-currency US dollar loan, it needs to obtain US dollar liquidity, which puts pressure on funding markets and leads to an appreciation of the US dollar. We focus especially on the aftermath of the 2008–09 financial crisis, which has ... (full story)