Foreign Currency Bank Funding and Global Factors

The literature on the drivers of capital flows stresses the prominent role of global financialfactors. Recent empirical work, however, highlights how this role varies across countries andtime, and this heterogeneity is not well understood. We revisit this question by focusing onfinancial intermediaries' funding flows in different currencies. A concise portfolio modelshows that the sign and magnitude of the response of foreign currency funding flows to globalrisk factors depend on the financial intermediary's pre-existing currency exposure. An analysisof a rich dataset of European banks' aggregate balance sheets lends support to the modelpredictions, especially in countries outside the euro area