impact of global liquidity on the advanced economies, especially the United States and Europe.
My hypothesis is motivated by the evidence from an aggregate
ow of funds analysis, buildingon the BIS banking statistics. The evidence points to the combination of two features that iscritically important for understanding recent events - the two elements being
US dollar funding
.First, we will see that the US-dollar denominated assets of banks outside the United Statesare comparable in size to the total assets of the US commercial banking sector, peaking at over$10 trillion prior to the crisis. The BIS banking statistics reveal that a substantial portion of external US dollar claims are the claims of European banks against US counterparties.Second, on the funding side, we extend earlier studies that have shown how European globalbanks
nanced their activities by tapping the wholesale funding market in the United States
.For instance, the intero
ce accounts of foreign bank branches in the United States reveal thatforeign banks were raising large amounts of US dollar funding in the United States and thenchanneling the funds to head o
ce. Through these and other means, the large gross claims of European banks on US counterparties are matched by their large gross liabilities to US-basedsavers.The broad picture that emerges of the role of European global banks in determining US
nancial conditions can be depicted in terms of the schematic in Figure 1. European banksdraw wholesale funding from the United States and then lend it back to US residents. Al-though European banks’ presence in the domestic US commercial banking sector is small, theirimpact on overall credit conditions looms much larger through the shadow banking system inthe United States that relies on capital market-based
nancial intermediaries who intermediatefunds through securitization of claims.The role of European global banks in determining US
nancial conditions highlights the
The impact of global liquidity on emerging and developing economies has been explored in Bruno and Shin(2011).
See, for instance, the BIS studies by Baba, McCauley and Ramaswamy (2009) and McGuire and von Peter(2009) on the use of US dollar wholesale funding by European global banks. Acharya and Schnabl (2009) reportthat European banks were sponsors for around 70% of the asset-backed commercial paper (ABCP) originatedprior to the subprime crisis.