Arbitrage Capital of Global Banks

Abstract

Financial Markets, and the WFA for helpful comments and suggestions. This paper uses data licensed from DTCC Solutions LLC, an affiliate of The Depository Trust & Clearing Corporation. Neither DTCC Solutions LLC nor any of its affiliates shall be responsible for any errors or omissions in any DTCC data included in this paper, regardless of the cause and, in no event, shall DTCC or any of its affiliates be liable for any direct, indirect, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or lost profit, trading loses and opportunity costs) in connection with this paper. We thank Anya Clowers for excellent research assistance.The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, any other person associated with the Federal Reserve System, or the National Bureau of Economic Research. All remaining errors are our own. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

U.S. Banks and Global Liquidity

“…We purposely exclude unsecured wholesale funding instruments (such as fed funds, eurodollars, commercial paper and certificate of deposits) from the liabilities because U.S. GSIBs' reliance on these sources of unsecured wholesale funding is small during our sample period based our data. This fact is also separately documented inAnderson et al (2019).…”

“…Liao (2020) examines financial and non-financial corporates arbitraging long-term CIP deviations through currency-hedged borrowing in different currencies. Anderson, Du, and Schlusche (2019) calculate the amount of potential capital of global banks to arbitrage CIP deviations. Liao and Zhang (2020) examine the impact of hedging demand and global imbalance on CIP deviations.…”

“…First, as noted previously, regulations that govern the disclosure of banks' leverage ratios incentivize foreign banks to shrink the size of their balance sheets at quarter ends. In particular, Anderson et al (2019) show that foreign banks are actively engaged in the IOR arbitrage and significantly contract their IOR arbitrage positions on quarter-ends. U.S. banks do not engage in much IOR arbitrage.…”

Covered interest parity deviations: Macrofinancial determinants

“…Anderson, Du and Schlusche (2019) provide evidence that following the prime MMF reform, global banks further cut back on arbitrage positions funded by unsecured borrowing.…”

The Term Structure of Covered Interest Rate Parity Violations

“…See also Liao (2016) for arguments of hedging demand. Anderson, Du, and Schlusche (2019) indicate that banks' arbitrage positions reduced in response to a reduction in wholesale funding supply following a regulatory change in the money market mutual fund industry in 2016. Avdjiev, Du, Koch, and Shin (2019) cite banks' leverage constraints as a source of friction, driven by the strength of the dollar.…”