BIS国际清算银行-Dollar-funding-costs-during-the-Covid-19-crisis-through-the-lens-of-the-FX-swap-market_8页_736kb

BIS Bulletin Summary: Dollar Funding Costs During the Covid-19 Crisis Through the Lens of the FX Swap Market

Core Content

This BIS Bulletin analyzes the sharp increase in dollar funding costs during the Covid-19 crisis, focusing on the FX swap market as a key indicator. It explores the dynamics of demand and supply for dollar funding, the role of central bank interventions, and the broader policy implications.

Main Points

Key Takeaways

• Since the start of the pandemic, dollar funding costs in foreign exchange markets have risen sharply, reaching levels last seen during the Great Financial Crisis (GFC).
• The FX swap basis, which measures the difference between the dollar interest rate in the money market and the implied dollar rate from the FX swap market, has widened significantly.
• A large negative basis indicates a scarcity of dollar funding, reflecting reduced supply from financial intermediaries.
• Central banks' deployment of dollar swap lines has helped narrow the basis, but challenges remain in ensuring market resilience and liquidity beyond the banking system.

Demand for Dollars

• Institutional investors, including insurers, pension funds, and portfolio managers, play a central role in the demand for dollar funding.
• These investors have large foreign currency portfolios, often dollar-denominated, and hedge their currency risk using FX swaps and forwards.
• The demand for dollar funding has grown substantially since the GFC, driven by increased global diversification of portfolios.
• Japanese investors continue to show strong demand for dollars, as evidenced by the JPY/USD basis.

Supply of Hedging Services

• The supply of dollar funding from banks and financial intermediaries has decreased due to financial turbulence and reduced risk-taking capacity.
• Post-GFC, banks have become more sensitive to the strength of the US dollar, as a broader dollar appreciation increases credit risk and reduces their willingness to supply FX hedging services.
• The FX swap basis has shown a negative correlation with the US dollar index, indicating that dollar strength affects the availability of hedging services.

Policy Responses and Challenges

• Central banks have introduced swap lines and liquidity facilities to alleviate dollar funding stress, with notable success in narrowing the FX swap basis.
• However, broader policy challenges persist, including the need to channel liquidity to non-banks and ensure the stability of dollar funding markets.
• The crisis differs from the 2008 GFC, requiring policies that extend beyond the banking sector to support final users, especially those in global supply chains.

Key Information

FX Swap Basis Movements

• The three-month FX swap basis against the US dollar has widened significantly for major currencies (e.g., JPY, EUR, CHF, GBP).
• The basis has narrowed after central bank interventions, but remains elevated for some currencies.
• The basis is calculated using the covered interest parity condition, comparing US dollar Libor with FX swap-implied rates.

FX Swap and Forward Usage

• FX swaps account for approximately 75% of outstanding positions in the FX swap/forward market.
• Short-term FX swaps are the most common, with a large portion of transactions maturing within a week.
• Non-bank entities, including insurers, pension funds, and non-financial corporations, use FX swaps and forwards to hedge foreign currency exposure.

Impact of the Pandemic

• The financial turbulence caused by the pandemic has led to a sharp decline in the supply of dollar funding.
• Corporate borrowers have drawn down credit lines from banks, reducing other forms of lending.
• Prime money market funds have experienced redemptions, further tightening the dollar funding supply.

Policy Actions

• The Federal Reserve enhanced swap lines with five central banks and introduced temporary liquidity arrangements with nine others.
• A new temporary repo facility was announced to provide dollar liquidity to foreign and international monetary authorities.
• Policies to support non-banks, such as funding for lending schemes, are being considered to ensure broader access to dollar liquidity.

Conclusion

The FX swap market provides a critical lens for understanding dollar funding costs during the pandemic. The surge in demand from institutional investors, combined with a decline in supply from banks, has driven up these costs. Central bank interventions have mitigated some of the stress, but the broader policy challenge remains to ensure the resilience of dollar funding markets and to support non-bank entities in accessing liquidity. The relationship between the dollar exchange rate and funding costs underscores the importance of monitoring and managing global financial conditions.