By way of background, the dollar liabilities of foreign banks have grown rapidly in the past two decades and now stand at about $ trillion, roughly on par with those of U.S. banks.2 A significant proportion of foreign banks’ dollar liabilities are raised via U.S. branches, most of which are legally precluded from raising deposits insured by the Federal Deposit Insurance Corporation.
The main source of funding for these branches, therefore, comes from uninsured wholesale claims such as large time deposits, making the cost and availability of such dollar funding highly sensitive to changing perceptions of these banks’ creditworthiness. In our work, we asked how shocks to the ability of foreign banks to raise dollar funding might lead to changes in their lending.