IDEAS home Printed from https://ideas.repec.org/a/ijc/ijcjou/y2018q3a7.html
   My bibliography  Save this article

Deviations from Covered Interest Rate Parity and the Dollar Funding of Global Banks

Author

Listed:
  • Tomoyuki Iida

    (Bank of Japan)

  • Takeshi Kimura

    (Bank of Japan)

  • Nao Sudo

    (Bank of Japan)

Abstract

By developing an equilibrium model of the FX swap market, this paper studies the determinants of deviations from covered interest rate parity (CIP) and investigates how changes in the environment surrounding the FX swap market affect the U.S. dollar funding of global banks. We find that the role of global banks' creditworthiness in determining CIP deviations has been supplanted by global interest rate differentials, which reflect monetary policy divergence among advanced economies. Our model and an empirical analysis suggest that the sensitivity of CIP deviations to variation in global interest rate differentials has risen, as regulatory reforms have increased the marginal cost of global banks' dollar funding. We also show that real money investors have increased their presence as suppliers of U.S. dollars in the FX swap market and their investment behavior has significantly affected CIP deviations and hence the dollar funding of global banks.

Suggested Citation

  • Tomoyuki Iida & Takeshi Kimura & Nao Sudo, 2018. "Deviations from Covered Interest Rate Parity and the Dollar Funding of Global Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 14(4), pages 275-325, September.
    • Handle: RePEc:ijc:ijcjou:y:2018:q:3:a:7
    as

    Download full text from publisher

    File URL: http://www.ijcb.org/journal/ijcb18q3a7.pdf
    Download Restriction: no
    File URL: http://www.ijcb.org/journal/ijcb18q3a7.htm
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gab-Je Jo, 2024. "Analysis of Long-Term Bond Yields Using Deviations from Covered Interest Rate Parity," JRFM, MDPI, vol. 17(3), pages 1-15, March.
    2. Pēteris Kloks & Patrick McGuire & Angelo Ranaldo & Vladyslav Sushko, 2023. "Bank positions in FX swaps: insights from CLS," BIS Quarterly Review, Bank for International Settlements, September.
    3. Ferrara, Gerardo & Mueller, Philippe & Viswanath-Natraj, Ganesh & Wang, Junxuan, 2022. "Central bank swap lines: micro-level evidence," Bank of England working papers 977, Bank of England.
    4. Dagfinn Rime & Andreas Schrimpf & Olav Syrstad, 2022. "Covered Interest Parity Arbitrage," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 5185-5227.
    5. Torsten Ehlers & Mathias Hoffmann & Alexander Raabe, 2020. "Non-US global banks and dollar (co-)dependence: how housing markets became internationally synchronized," BIS Working Papers 897, Bank for International Settlements.
    6. Mr. Tobias Adrian & Peichu Xie, 2020. "The Non-U.S. Bank Demand for U.S. Dollar Assets," IMF Working Papers 2020/101, International Monetary Fund.
    7. Ibhagui, Oyakhilome, 2021. "How do sovereign risk, equity and foreign exchange derivatives markets interact?," Economic Modelling, Elsevier, vol. 97(C), pages 58-78.
    8. Aldasoro, Iñaki & Ehlers, Torsten & Eren, Egemen, 2022. "Global banks, dollar funding, and regulation," Journal of International Economics, Elsevier, vol. 137(C).
    9. Krohn, Ingomar & Sushko, Vladyslav, 2022. "FX spot and swap market liquidity spillovers," Journal of International Money and Finance, Elsevier, vol. 120(C).
    10. Sevgi Coşkun & Oyakhilome Ibhagui, 2022. "Technology shocks and covered interest parity deviations in emerging market economies," Empirical Economics, Springer, vol. 63(3), pages 1337-1374, September.
    11. Dušan Staniek, . "Cross-Currency Basis Spread and Its Impact on Corporate Lending Rates in the Czech Banking Sector," Prague Economic Papers, Prague University of Economics and Business, vol. 0.
    12. Syrstad, Olav & Viswanath-Natraj, Ganesh, 2022. "Price-setting in the foreign exchange swap market: Evidence from order flow," Journal of Financial Economics, Elsevier, vol. 146(1), pages 119-142.

    More about this item

    JEL classification:

    • F39 - International Economics - - International Finance - - - Other
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2018:q:3:a:7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bank for International Settlements (email available below). General contact details of provider: https://www.ijcb.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.