BIS Bulletin
No 15
US dollar funding markets during the Covid-19
crisis – the international dimension
Egemen Eren, Andreas Schrimpf and Vladyslav Sushko
12 May 2020
BIS Bulletins are written by staff members of the Bank for International Settlements, and from time to time by other
economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in
character. The views expressed in them are those of their authors and not necessarily the views of the BIS. The
authors are grateful to Alan Villegas and Amanda Liu for excellent analysis and research assistance, and to Louisa
Wagner for administrative support.
This publication is available on the BIS website ().
© Bank for International Settlements 2020. All rights reserved. Brief excerpts may be reproduced or
translated provided the source is stated.
ISSN: 2708-0420 (online)
ISBN: 978-92-9197-382-7 (online)
Key takeaways
Dislocations in domestic US dollar money markets reverberated globally. Non-US banks lost a
substantial part of funding from money market funds and had to borrow at shorter maturities.
Nevertheless, the severity of dollar funding strains varied substantially across banks, and eased for
banks from jurisdictions with standing swap lines with the Federal Reserve.
The impact of policy measures to quell the stress was felt unevenly across different funding
markets. The divergence between key rates resulted in an unusual divergence of funding cost
metrics, with some indicating a “dollar glut” while others a “dollar shortage”.
Egemen Eren
@
Andreas Schrimpf
@
Vladyslav Sushko
@
US dollar funding markets during the Covid-19 crisis – the
international dimension
Dislocations in core US dollar funding markets in March and April 2020 reverberated through the balance sheets of
global banks. One important catalyst was the stress in the markets for commercial paper (CP) and certificates of
deposits (CDs), debt instruments issued by banks to source funding from non-bank investors such as money
market funds (MMFs). Non-US banks lacking access to insured retail dollar deposits are particularly dependent
on this type of funding to finance dollar assets. Hence, during the earlier phases of the crisis, non-US banks
were especially hit by the decline in both the volumes and maturities of CP/CD funding, when prime MMFs
withdrew as marginal buyers of CP/CD after facing large outflows (see Eren, Schrimpf, and Sushko (2020)).
Disruptions in these core funding markets spilled over globally, contributing to wide swings in “offshore” US
dollar funding costs, as indicated, for instance, by the cross-currency basis.
A number of policy measures helped to stabilise short-term dollar funding markets, but markets for different
instruments normalised at different speeds. This opened up a wedge in funding conditions across key market
segments. For example, funding stresses quickly eased for banks in jurisdictions with standing swap lines with the
Federal Reserve. In such cases, dollar liquidity operations in March allowed the banks to access dollar funding
cheaply and easily. This was also reflected in the diverging funding costs paid by these banks in CP/CD markets,
which were lower compared with others (without such access or banks that benefited from the expanded dollar
liquidity operations only later, in April).
This Bulletin focuses on the developments in FX swap markets and the divergence in key US dollar funding
rates during the Covid-19 crisis. In a companion Bulletin, Eren, Schrimpf, and Sushko (2020) describe the
money market fund turmoil that acted as the key transmitter of the funding shock. This article, by contrast, focuses
primarily on the pull-back of funding from non-US banks and the associated international spillover effects. It
shows that key dollar funding rates – which usually track each other closely
– diverged markedly during this episode, and that the funding costs for market participants reliant on MMF
funding varied greatly between banks, even for institutions of comparable creditworthiness.
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Funding strains hit FX swap markets
Non-US banks were impacted disproportionately by the large outflows from prime MMFs during the Covid-19
crisis and the associated stress in unsecured funding markets (Graph 1, first panel). These banks are some of the
heaviest issuers of unsecured short-term paper (eg three-month CP and CDs) in US money markets due to their lack
of a stable dollar retail deposit base. As during the Great Financial Crisis (GFC), MMFs constituted the main
dollar lenders to non-US banks (Baba, McCauley and Ramaswamy (2009), Aldasoro, Ehlers and Eren (2019)).
As in past periods of strains in US dollar funding liquidity, the FX swap market, which serves as an
important alternative funding source, came under FX swaps link money markets in different
currencies, allowing banks to raise dollars in cross-currency funding markets. The so-called cross-currency basis can
emerge if the interest differential implicit in FX swaps (as captured by the differential between the spot and
forward exchange rate) deviates from the differential in the money market rates in the two currencies. A non-
negligible cross-currency basis for dollar currency pairs means that the dollar is at a premium (or a discount) in
FX swaps vis-à-vis the other currency. For instance, a negative basis indicates that it is more expansive to borrow
dollars via FX swaps than in cash markets.
US dollar money market and FX swap-implied rates and select Fed operations Graph 1
3-month funding spreads FX swap-implied basis Fed liquidity operations1 Alternative dollar rates
Per cent Basis points USD bn Per cent
0
–80
–160
–240
Feb 20 Apr 20
–
Feb 20 Apr 20
–320
Feb 20 Apr 20 Feb 20 Apr 20
T-bill–OIS
LIBOR–
OIS
A1/P1 CP–T-bill
LIBOR basis: OIS basis:
3m EURUSD
3m JPYUSD
CB USD swap lines
MMLF
3m USD LIBOR
3m EURIBOR + 3m FX swap
3m JPY LIBOR + 3m FX swap
CB USD swap line rate
The dashed vertical line in the first panel indicates 18 March 2020 (the establishment of the Fed Money Market Mutual Fund Liquidity Facility, MMLF);
the solid vertical line in the second and fourth panels indicates 16 March 2020 (Monday following the announcement of expanded US dollar liquidity
swap lines).
1 Outstanding amount of central bank USD swap lines or money market mutual fund liquidity facility; Wednesday observations. Sources:
Board of Governors of the Federal Reserve System; Bloomberg; JPMorgan Chase; authors’ calculations.
At the height of the funding squeeze in mid-March, FX swap spreads indicated a scramble for US dollars,
reminiscent of the situation during the GFC and the euro area debt crisis. The cost of US dollar funding via
three-month FX swaps against euro and Japanese yen collateral exceeded USD LIBOR by a respective 85 bp and
150 bp (Graph 1, second panel). The situation was even more extreme for some other currencies, in particular where
the central bank had no swap line with the Fed at the time. A notable example is the Korean won.
1 See Avdjiev, Eren and McGuire (2020) for an analysis of dollar funding costs through the lens of FX swap markets during the Covid-19
crisis.
360
240
120
0
As part of an unscheduled announcement on Sunday 15 March, the Fed made important changes to its swap
lines with its five main central bank counterparties (Canada, the euro area, Japan, Switzerland and the United
Kingdom). These consisted of a cost reduction (from 50 bp to 25 bp over USD overnight indexed swap (OIS)
rates) and weekly dollar offerings via longer-term, 84-day (ie three-month), dollar swaps (in addition to the pre-
existing seven-day operations, which now take place daily). On 19 March, the Fed further announced the
expansion of the swap line network to nine additional central banks, which have since been offering US dollar
liquidity in ad hoc operations since the end of March.
US dollar auctions by foreign central banks saw immediate and widespread take-up, especially by Japanese
and European banks, which took advantage of the cheap pricing to replenish their dollar funding. This favourable
access to dollar funding meant that an important set of participants in the global financial system did not have to
shed US dollar assets at fire-sale By early May, the Fed’s central bank swap lines, with $448 billion taken
up, have been the most utilised of all the Fed’s funding and credit facilities (Graph 1, third panel).3 The Money
Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF), both
aimed at repairing CP/CD markets, saw respective take-ups of only
$ billion (after peaking at $ in early April) and $ billion.
A tale of two cross-currency bases
A highly unusual price configuration for dollar funding then emerged once the strains in the FX swap market
eased, thanks to the above-mentioned US dollar auctions by the central banks. FX swap markets signalled
simultaneously a US dollar premium and a discount, depending on which set of money markets instruments were
used to source the foreign currency to swap for the dollars, and which set of money market instruments were
used to place the US dollars. Specifically, the cross-currency basis based on risk- free (OIS) rates narrowed
noticeably, but still indicated a dollar funding premium in FX swaps, as compared with money markets. By contrast,
bases calculated based on unsecured rates (LIBOR) turned positive, indicating cheaper access to dollars via FX
swaps than in money markets (Graph 1, second panel).
The anomaly emerged because the divergence between unsecured and risk-free dollar interest rates due to
market stress did not recede even as FX swap spreads narrowed substantially after the central bank swap line facility
was activated. In normal times, unsecured funding rates, say in CP/CD markets, represent marginal funding costs for
banks. Hence, in a normal environment, FX swap pricing is more closely aligned with unsecured funding rates (see
the narrower currency basis in January and February, Graph 1, second panel), than it is with risk-free rates (see the
wider currency basis in January and February, Graph 1, second panel).4 But, in March, as a number of banks turned
to central bank swap lines for dollar funding, priced at USD OIS + 25bp (Graph 1, fourth panel), OIS rates began
exerting a greater influence on FX swap pricing, reflecting the option of turning to central bank liquidity facilities
rather than to interbank borrowing.
At the same time, non-US banks without access to central bank facilities were more likely to face funding
costs closer to unsecured funding rates (eg LIBOR), which remained elevated because the impairments in
dollar CP and CD markets persisted well into April (Graph 1, first panel). Hence, something
2 Also see Bahaj and Reis (2020), who show that central bank swap lines during the Covid-19 crisis were more effective in currencies
with a higher take-up in USD operations by the respective central bank.
3 Via the MMLF, the Fed extends loans to dealers to purchase eligible assets from MMFs, priced at 100 bp over the discount window
rate (25 bp) for lending against CP collateral. Via the CPFF, which became operational only from April 14, the Fed directly purchases
three-month CP from issuers. The pricing for the CPFF is OIS +110 bp for A1-rated and OIS + 200 bp for A2- rated CP. Thus both facilities
are priced at a considerably higher rate than the central bank swap lines. A key difference is that the Fed and the US government are
insulated from any credit risk in the dollar liquidity operations with other central banks.
4 The OIS rate is conceptually an amalgam of expectations of the evolution of an overnight rate (and hence the direction of monetary
policy) plus a term premium. For example, a USD OIS rate is the fixed rate paid in exchange for receiving the effective federal funds rate
over the term of the contract. Due to collateralisation and because counterparties in an OIS do not exchange principal, there is essentially no
credit risk embedded in the rate. As such, there is no dispersion across banks in the rate paid or received in an OIS contract.
like a tug of war emerged between OIS rates and the IBORs as to which type of interest rate would anchor FX swap
pricing. Dragged down by the cheap outside funding option for banks via central bank swap lines, the cost of dollar
funding via FX swaps thus narrowed substantially relative to what IBOR rate differentials alone would imply.
Given this unusual situation, in which FX bases calculated using LIBOR changed their signs from
negative to positive, some banks found it economical to adjust their funding patterns. The pricing of FX swaps
implied that raising three-month funding in, say, euro unsecured markets at EURIBOR and then swapping into
US dollars (paying the FX swap spread) had become cheaper than funding directly at the elevated US dollar
Some market participants report taking advantage of the positive LIBOR basis by borrowing euros
unsecured, swapping them into US dollars and lending at rates close to USD LIBOR. Such “arbitrage” would lead
to upward pressure on EURIBOR and downward pressure on dollar LIBOR, which indeed was the case in the
later stages of this episode. International cross-currency arbitrage thus helped to alleviate the stress in core US
dollar funding markets and helped to reduce CP/CD rates in April (Graph 1, first panel). This may support the idea
of the Fed’s swap lines as an effective tool in keep strains in offshore dollar markets from blocking the transmission
of its domestic monetary policy, as argued by McCauley and Schenk (2020).
Counterparty and maturity shifts in prime money market fund portfolios
March vs February 2020 Graph 2
Change in portfolio holdings across types and countries Change in maturities for financial unsecured funding1
USD bn USD bn Percentage points
7 70
0 0
–7
–14
–21
–28
FR JP GB NL
DE
US CA NO AU CH SG SE JP FR DE
GB
NL NO AU CH CA US SG SE
Mar–Feb change (lhs): Value (rhs):
Financial unsec: Non-
financial unsec:
2019 2020 Feb 2020
Overnight
2–7 days
8–30 days
>30 days
Financial unsec = unsecured instruments issued by financial institutions (CP, CD, time deposits etc); Non-financial unsec = unsecured instruments
issued by non-financial institutions (mostly CP).
1 For each maturity, difference between the share (percentage of new originations) in March 2020 minus the share in February 2020. Sources:
Crane Data; authors’ calculations.
Redemptions from MMFs and funding for non-US banks
Some of the channels via which the US money market turmoil disrupted the unsecured funding for banks in CP/CD
markets can be gleaned from granular MMF holdings data (see also Eren, Schrimpf and Sushko (2020)). Outflows
from US prime funds led to a sharp pullback from lending in general, including lending
5 In the fourth panel of Graph 1, this is depicted by the blue (EURUSD) and red (JPYUSD) lines compared with the black line; and the
difference between each pair is the LIBOR basis shown in the second panel.
20
10
0
–10
–20
–30
to non-US institutions (Graph 2, left-hand panel). At the same time, even when funding was not lost overall, it became
increasingly concentrated at shorter maturities, raising rollover risk. For some banking systems, this meant an
increase of more than 20 percentage points in overnight or weekly funding at the expense of longer-term funding
between February and March (Graph 2, right-hand panel). The evaporation of term funding liquidity in core US
dollar money markets in turn pushed a number of non-US institutions towards raising dollars via three-month FX
swaps, thus widening the cross-currency basis, as described above.
Funding cost divergence and a discount for central bank swap line access
In basis points Graph 3
Dispersion in banks’ funding costs1 Foreign bank CP/CD funding costs relative to US banks2
11 12 13 14 15 16 17 18 19 20 2018 2019 2020
CP/CD rate dispersion: Median
25th–75th percentiles
5th–95th percentiles
Jurisdictions with standing swap lines: Others:
Coefficient
95% confidence interval
The shaded areas in the left-hand panel indicate August 2011–December 2012 (euro area sovereign debt crisis) and April–October 2016 (MMF reform
adjustment phase).
1 Based on 311,172 CP/CD contracts of MMFs with 76 US and non-US banks between January 2011 and March 2020 (month-end data). Plotted are
residuals from the regression of the CP/CD rate on four maturity bucket dummies (ON, 2–7d, 8–30d, >30d), contract size, issuer fixed effects and date
fixed effects. 2 Using 85,429 CP/CD contracts of MMFs with 14 US banks, 39 non-US banks headquartered in jurisdictions with standing swap
lines with the Federal Reserve (CA, CH, euro area, GB, JP) and 23 non-US banks without standing swap lines, between January 2018 and March 2020
(month-end data). The coefficients are based on the regression of the CP/CD rate on four maturity bucket dummies (ON, 2–7d, 8–30d, >30d), contract
size, issuer×fund interaction fixed effects, date fixed effects and an interaction of each date fixed effect with a dummy for headquarter in one of five
standing swap line countries.
Sources: Crane data; authors’ calculations.
At the same time, borrowing costs did not rise uniformly across institutions – a common feature of episodes
of funding strains, especially in US dollar markets (Rime, Schrimpf and Syrstad (2017)). In fact, the dispersion in
CP/CD rates across banks jumped to levels exceeding anything observed over the past decade (Graph 3, left-hand
panel), as investors became more discriminating about a bank’s dollar funding options and overall balance sheet
strength. Notably, banks headquartered in one of the five jurisdictions with Federal Reserve central bank swap
lines paid considerably less for funding, even compared with US banks (Graph 3, right-hand panel). A key
reason may have been investor awareness of their ability to source dollars via central bank swap lines, the cost of
which had been cut on 15 March (see above).
The expansion of the Fed’s swap line network to nine additional central banks, announced on 19 March,
also improved the funding situation of banks headquartered in these countries. But not immediately,
because the majority of dollar liquidity auctions by these new swap line member central banks only started to
take place in early April. Hence, the dispersion in funding costs for non-US banks in core US dollar money
markets very much reflected the differences in the options they had in terms of access to dollar funding – direct
onshore, versus FX swaps, versus central bank swap lines (as illustrated for the case of EURUSD and JPYUSD in
Graph 1, fourth panel).
40
0
–40
–80
–20
–10
0
10
Discussion
The deterioration in global dollar funding conditions during the height of the Covid-19 crisis was a reminder
of global banks’ reliance on short-term unsecured funding in US money markets. Just as during the GFC, MMFs
pulled back as holders of short-term paper issued by non-US banks, exposing the roll- over risk posed by this
form of funding in episodes of stress. Hence, the events in March showed that the 2016 reforms did not extinguish
completely the MMF redemption channel in exacerbating bank funding stresses (see also Eren, Schrimpf and
Sushko (2020)).6
At the same time, the speed of the subsequent recovery in funding conditions for banks
headquartered in jurisdictions with easy and cheap access to dollars through standing swap lines with the Fed
highlights the effectiveness of central bank swap line facilities. These facilities helped to counter some of the forces
that hampered the transmission of the Fed’s monetary policy stimulus both domestically and internationally. The
rapid take-up of central bank dollar liquidity facilities also reflected the stigma-free access, as banks did not have
to worry about any possible negative signalling from tapping central bank liquidity. This is good news as it further
suggests that banks have not been a major source of vulnerabilities during the Covid-19 crisis, in contrast to the case
during the GFC.
References
Aldasoro, I, T Ehlers and E Eren (2019): “Global banks, dollar funding, and regulation”, BIS Working Papers, no
708.
Avdjiev, S, E Eren and P McGuire (2020): “Dollar funding costs during the Covid-19 crisis through the lens of the
FX swap market”, BIS Bulletin, no 1.
Baba, N, R McCauley and S Ramaswamy (2009): “US dollar money market funds and non-US banks”, BIS
Quarterly Review, March, pp 65–81.
Bahaj, S and R Reis (2020): “Central bank swap lines during the Covid-19 pandemic”, in Covid Economics, Vetted
and real-time papers, Issue 2, 8 April, CEPR.
Eren, E, A Schrimpf and V Sushko (2020): “US dollar funding markets during the Covid-19 crisis – the money market
fund turmoil”, BIS Bulletin, no 14.
McCauley, R and C Schenk (2020): “Central bank swaps then and now: swaps and dollar liquidity in the 1960s”,
BIS Working Papers, no 851.
Rime, D, A Schrimpf and O Syrstad (2017): “Segmented money markets and covered interest parity
arbitrage”, BIS Working Papers, no 651.
6 The reform addressed some of the lessons learned during the GFC, when the Reserve Primary Fund was forced to reduce its NAV to
below $1 due to massive losses, triggering a panic among investors. The reform required prime funds to switch from a stable to a floating
NAV calculation and introduced redemption gates and fees at a fund’s discretion should its weekly liquid assets (a combination of
government securities and other assets maturing within a week) fall below 30%.
Previous issues in this series
No 14
12 May 2020
US dollar funding markets during the Covid- 19
crisis – the money market fund turmoil
Egemen Eren, Andreas Schrimpf
and Vladyslav Sushko
No 13
11 May 2020
The CCP-bank nexus in the time of Covid-19 Wenqian Huang and Előd Takáts
No 12
7 May 2020
No 11
5 May 2020
Effects of Covid-19 on the banking sector: the
market’s assessment
Releasing bank buffers to cushion the crisis – a
quantitative assessment
Iñaki Aldasoro, Ingo Fender, Bryan
Hardy and Nikola Tarashev
Ulf Lewrick, Christian Schmieder,
Jhuvesh Sobrun and Előd Takáts
No 10
28 April 2020
Covid-19 and corporate sector liquidity Ryan Banerjee, Anamaria Illes,
Enisse Kharroubi and José-Maria
Serena
No 9
24 April 2020
No 8
21 April 2020
No 7
17 April 2020
No 6
14 April 2020
No 5
7 April 2020
No 4
6 April 2020
Buffering Covid-19 losses – the role of
prudential policy
Identifying regions at risk with Google Trends:
the impact of Covid-19 on US labour markets
Macroeconomic effects of Covid-19: an early
review
The recent distress in corporate bond
markets: cues from ETFs
Emerging market economy exchange rates and
local currency bond markets amid the Covid-
19 pandemic
The macroeconomic spillover effects of the
pandemic on the global economy
Mathias Drehmann, Marc Farag,
Nikola Tarashev and Kostas
Tsatsaronis
Sebastian Doerr and Leonardo
Gambacorta
Frederic Boissay and Phurichai
Rungcharoenkitkul
Sirio Aramonte and Fernando
Avalos
Boris Hofmann, Ilhyock Shim and
Hyun Song Shin
Emanuel Kohlscheen, Benoit Mojon
and Daniel Rees
No 3
3 April 2020
Covid-19, cash, and the future of payments Raphael Auer, Giulio Cornelli and
Jon Frost
No 2
2 April 2020
No 1
1 April 2020
Leverage and margin spirals in fixed income
markets during the Covid-19 crisis
Dollar funding costs during the Covid-19 crisis
through the lens of the FX swap market
Andreas Schrimpf, Hyun Song Shin
and Vladyslav Sushko
Stefan Avdjiev, Egemen Eren and
Patrick McGuire
All issues are available on our website .
