- Dollar remains the pre-eminent international funding currency even as market structure shifts
- To preserve the benefits of this shift, the strength of the intermediation chain must be ensured
- Better data collection needed to improve assessment and stronger regulation could mitigate risks
The US dollar remains the pre-eminent international funding currency, even amid significant shifts in market structure, according to a new report by the Committee on the Global Financial System.
US dollar funding: an international perspective finds that US dollar funding is below its peak of a decade ago relative to the size of the global economy, although the US dollar’s share of international funding has returned to the dominant position it held around the turn of the century. The widespread use of the US dollar has benefited participants, but the resulting interconnectedness of the market can also create vulnerabilities.
The report highlights how activity has declined in Europe but risen elsewhere, including in emerging market economies. Marketable securities – which include bonds, medium-term notes and money market instruments – account for three-quarters of the increase in the nominal stock of US dollar funding in the past five years, and the role of non-banks in intermediation has grown. These structural shifts have increased market complexity as well as the speed and scope of stress transmission throughout the global financial system.
“In order to preserve the benefits from a global funding market based in US dollars we will need to make sure that the intermediation chain is robust,” said Philip Lowe, CGFS Chair and Governor of the Reserve Bank of Australia. “We have made progress with banks after the global financial crisis but we do not have enough transparency on the activity of non-banks.”
The report points out where better data collection by the official sector, strengthened regulatory treatment of currency mismatches on non-bank intermediaries’ balance sheets, and more robust safety nets can improve the assessment and mitigation of risks associated with dollar funding.
The Covid-19 crisis validated many of the report’s messages but it also had an important impact on dollar funding activity, including the consequent increase in market volatility and the risks of increased demand for liquidity and further intermediation challenges.