Thread by @Brad_Setser

The BIS (@i_aldasoro and others) continues to provide the best analysis of global dollar funding around

"Dollar borrowers (Graph 3, left-hand panel) obtained between $630 billion and $855 billion via FX
swaps, and channelled these funds into liquid assets and to non-banks."

1/n

The net swap need of the system as a whole is manageable -- as there are banks with excess dollars too

"For their part, the dollar lenders supplied between $628 billion and $701 billion. On net, non-US banks as a
whole therefore needed around $227 billion from other sources."

As the BIS notes, in good times US banks could have met most of this need -- but in March the US banks themselves were under strain.

In normal times, banks outside the US could have sold liquid assets (Treasuries) to meet their need too ... but March wasn't normal

3/n

The BIS advances the ball significantly in its analysis of the funding need of Japanese banks -- who borrow roughly equal amounts ~ $200b from the swap market and MMFs

These estimates are smaller than past estimates because they "excludes estimates of trustee positions Japanese banks hold on behalf of customers"

(footnotes are often critical ... thanks to one of the authors of the report for pointing this out to me!)

5/n

"Japanese and Canadian banks are examples of dollar borrowers in the FX swap market. They borrowed dollars from MMFs and roughly equal amounts via FX swaps, to support their net lending to non-banks as well as holdings of reserves and USTs. "

6/n

Why then were Japanese banks such big users of the swaps? Well partially because the Fed (and the BoJ) wanted them to use the swaps rather than sell US Treasuries, and partially because they act as intermediaries vis a vis the swaps needs of non-banks (insurers!)

7/n

This is important:

"Non-US banks use their offices around the globe to source dollars. Only a small share (22% ) of their dollar liabilities are booked at their affiliates in the U.S., The other 78%, a full $10 trillion in dollar liabilities, is recorded outside the U.S."

8/n

I would note that while emerging market banks account for a significant share of the $13 trillion in USD liabilities of banks outside the US, many EM banks also have significant domestic sources of dollar liquidity -- they aren't necessarily big users of swaps to get USD.

9/n

Excellent work from Iñaki Aldasoro, Torsten Ehlers, Patrick McGuire and Goetz von Peter.

The creation of the BIS Bulletin by @HyunSongShin is a crisis era innovation that I hope lives on!

bis.org/publ/bisbull27…