Lastly, regarding the U.S. dollar funding of non-U.S. banks, the reliance on foreign exchange swaps (FX swaps) is trending higher (Chart 2). When non-U.S. banks extend credit in dollars, they have to fund themselves in dollars, and often their on-balance-sheet credit extensions exceed their funding in dollars. This gap in funding is usually covered by FX swaps, which exchange domestic currency with dollars.
In an FX swap, the parties to the transaction simultaneously conclude the purchase and sale of two different currencies of equal value on two separate delivery dates in the opposing direction.