I read almost the whole thing and copy pasted some highlights. The link to the BIS report (just released) is at the bottom.
Banks and bond investors have extended $9 trillion of
US dollar credit to non-bank borrowers outside
the United States. This has relevance for the discussion of global liquidity and global monetary policy
transmission. This paper contributes to this policy discussion by analysing the links between US
monetary policy, including unconventional monetary policy, leverage and flows into bond funds, on the
one hand, and dollar credit extended to
non-US borrowers, on the other.
We find that prior to the crisis,
banks drew on low funding rates and low-cost leverage to extend dollar credit to non-US borrowers.
After the Federal Reserve announced its large-scale
bond purchases in 2008, however, bond investors
responded to compressed long-term rates by buying dollar bonds from non-US borrowers. The balance
of dollar credit transmission has shifted from
global banks to global bond investors.
Since 2009, dollar credit to non-financial borrowers outside the US has consistently grown
faster than that extended to US residents. In particular, its growth rate hovered near 10% and rose to as
high as 15% before the worst of the European sovereign and bank strains.
While studies of such economies at their broadest
would focus on economies in which a tenth or more of bank loans are dollar-denominated, offshore
dollar credit is mostly found in economies where it represents a single-digit percentage of credit. Thus,
the top three stocks of dollar credit are in jurisdiction
s that are not usually thought of as dollarised: the
euro area, China and the UK. The euro area and China have single-digit dollarisation rates, while the UK
is higher, in the mid-teens Dollar credit to Brazilian, Chinese and Indian
borrowers has grown rapidly since the global
financial crisis (Graph 5). On this measure, which includes offshore bond issuance by non-banks’ financial
subsidiaries outside the country (dark blue area),
dollar borrowing has reached more than $300 billion in
Brazil, $1.1 trillion in China, and $125
billion in India. The rapid growth of
bonds relative to loans is more
evident in Brazil and India than in China. Indeed,
in China and India, dollar credit continues to be
extended mostly through bank loans.
The extent and rate of growth of dollar credit
would be understated if one were to neglect the
area at the top in the panels of Graph 5 showing
the bonds issued by affiliates of Brazilian or Chinese
firms incorporated outside Brazil or China (McCauley et al (2013)).
The balance sheets of emerging
market multinational firms span the
national border, so balance of payments data do not capture their
consolidated accounts. Interpreting the flows of funds through the consolidated balance sheets of
multinational firms (eg Chinese real estate develop
ers selling high-yielding dollar bonds in Hong Kong)
represents a big analytical challenge.
We also abstract from non-US interest rates in recognition that much of US dollar borrowing takes place
through offshore subsidiaries of global firms whose
spreads relative to US interest rates are determined
by a complex mix of different yields on different currencies, which cannot be
inferred from their location.
Leverage:
Our indicators of financial system leverage include the VIX and financial commercial paper plus primary dealer repo outstanding. Graph 7 (left-hand panel) shows that the quantity measures of leverage
are closely associated with the VIX,
which may be capturing risk-on/sell-out spirals to the extent that it
proxies for the value-at-risk constraint of leveraged investors.
27
Hence, one way to interpret the VIX
(which, after all, is just a measure of implied volatilities of S&P500 index options) is that it captures
swings in the shadow cost of leverage by financial
institutions managing risk against a value-at-risk
constraint or the like. Thus, one may expect that the VIX, along with other measures of leverage, would
have a closer association with the behaviour of glob
al banks than with that of bond investors, which
would include not only leveraged investors but also real money accounts
(eg pension funds).
We draw four conclusions. First, dollar credit has flowed since the global financial crisis to an
unusual extent to emerging markets and to advanced
economies that were not hit by it. Dollar credit has
grown slowly in two economies where dollar credit
was large and growing rapi
dly before the crisis,
namely the euro area and
the UK. In other words, since the crisis
, dollar credit has grown fastest in the
economies with relatively high domestic interest
rates
There is alot more stuff here !
http://www.bis.org/publ/work483.pdf
Read more at http://investmentwatchblog.com/foreign-borrowers-get-9-trillion-us-dollars-while-residence-of-the-usa-get-squat-bis-news-release-is-huge/#GWBRpjQYlQb8h8K2.99
Banks and bond investors have extended $9 trillion of
US dollar credit to non-bank borrowers outside
the United States. This has relevance for the discussion of global liquidity and global monetary policy
transmission. This paper contributes to this policy discussion by analysing the links between US
monetary policy, including unconventional monetary policy, leverage and flows into bond funds, on the
one hand, and dollar credit extended to
non-US borrowers, on the other.
We find that prior to the crisis,
banks drew on low funding rates and low-cost leverage to extend dollar credit to non-US borrowers.
After the Federal Reserve announced its large-scale
bond purchases in 2008, however, bond investors
responded to compressed long-term rates by buying dollar bonds from non-US borrowers. The balance
of dollar credit transmission has shifted from
global banks to global bond investors.
Since 2009, dollar credit to non-financial borrowers outside the US has consistently grown
faster than that extended to US residents. In particular, its growth rate hovered near 10% and rose to as
high as 15% before the worst of the European sovereign and bank strains.
While studies of such economies at their broadest
would focus on economies in which a tenth or more of bank loans are dollar-denominated, offshore
dollar credit is mostly found in economies where it represents a single-digit percentage of credit. Thus,
the top three stocks of dollar credit are in jurisdiction
s that are not usually thought of as dollarised: the
euro area, China and the UK. The euro area and China have single-digit dollarisation rates, while the UK
is higher, in the mid-teens Dollar credit to Brazilian, Chinese and Indian
borrowers has grown rapidly since the global
financial crisis (Graph 5). On this measure, which includes offshore bond issuance by non-banks’ financial
subsidiaries outside the country (dark blue area),
dollar borrowing has reached more than $300 billion in
Brazil, $1.1 trillion in China, and $125
billion in India. The rapid growth of
bonds relative to loans is more
evident in Brazil and India than in China. Indeed,
in China and India, dollar credit continues to be
extended mostly through bank loans.
The extent and rate of growth of dollar credit
would be understated if one were to neglect the
area at the top in the panels of Graph 5 showing
the bonds issued by affiliates of Brazilian or Chinese
firms incorporated outside Brazil or China (McCauley et al (2013)).
The balance sheets of emerging
market multinational firms span the
national border, so balance of payments data do not capture their
consolidated accounts. Interpreting the flows of funds through the consolidated balance sheets of
multinational firms (eg Chinese real estate develop
ers selling high-yielding dollar bonds in Hong Kong)
represents a big analytical challenge.
We also abstract from non-US interest rates in recognition that much of US dollar borrowing takes place
through offshore subsidiaries of global firms whose
spreads relative to US interest rates are determined
by a complex mix of different yields on different currencies, which cannot be
inferred from their location.
Leverage:
Our indicators of financial system leverage include the VIX and financial commercial paper plus primary dealer repo outstanding. Graph 7 (left-hand panel) shows that the quantity measures of leverage
are closely associated with the VIX,
which may be capturing risk-on/sell-out spirals to the extent that it
proxies for the value-at-risk constraint of leveraged investors.
27
Hence, one way to interpret the VIX
(which, after all, is just a measure of implied volatilities of S&P500 index options) is that it captures
swings in the shadow cost of leverage by financial
institutions managing risk against a value-at-risk
constraint or the like. Thus, one may expect that the VIX, along with other measures of leverage, would
have a closer association with the behaviour of glob
al banks than with that of bond investors, which
would include not only leveraged investors but also real money accounts
(eg pension funds).
We draw four conclusions. First, dollar credit has flowed since the global financial crisis to an
unusual extent to emerging markets and to advanced
economies that were not hit by it. Dollar credit has
grown slowly in two economies where dollar credit
was large and growing rapi
dly before the crisis,
namely the euro area and
the UK. In other words, since the crisis
, dollar credit has grown fastest in the
economies with relatively high domestic interest
rates
There is alot more stuff here !
http://www.bis.org/publ/work483.pdf
Read more at http://investmentwatchblog.com/foreign-borrowers-get-9-trillion-us-dollars-while-residence-of-the-usa-get-squat-bis-news-release-is-huge/#GWBRpjQYlQb8h8K2.99
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