This paper provides novel empirical evidence on the effect of dislocations in FX swap markets ('CIP deviations') on bank lending. Using balance sheet data from UK banks we show that when the cost of obtaining swap-based funds in a particular foreign currency increases, banks reduce the supply of cross-border credit in that currency. This effect is increasing in the degree of banks' reliance on swap-based FX funding. Notably, high access to alternative funding sources of (on balance sheet) FX funding shield banks' cross-border FX lending supply from the described channel, but only if such access occurs via internal capital markets. There is evidence of some degree of substitution from banks outside the UK which are not affected by changes in the cost of accessing dollars or euros synthetically.

We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Using quantile regression, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Compared to most standard approaches, our methodology delivers a more nuanced picture of exchange rate behaviour, allowing for example to make probabilistic statements about the likelihood of observing large swings in returns given the prevailing global financial environment. We also identify macroeconomic fundamentals associated with different tail dynamics: currencies of countries with higher interest rates, low levels of international reserves and large fiscal deficits display more marked increases in the likelihood of large losses in response to a tightening of global financial conditions.

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We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Based on quantile regression results, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating some of the prevailing narratives about safe haven and risky currencies. We then carry out a portfolio sorting exercise to identify the macroeconomic fundamentals associated with such different tail behaviour, and find that currency portfolios sorted on the basis of relative interest rates, current account balances and levels of international reserves display a higher likelihood of large losses in response to a tightening of global financial conditions.