Banking Systemic Risk, Foreign Funding, Exchange Rate Exposure and Carry Trade: is there a relation?

Bruno Vasconcelos and Benjamin Tabak

No 365, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: We study what is the systemic impact of banks' foreign funding and what are the determinants of this flow of international money. With that, we intend to establish a relation between banks' foreign funding, carry trade, exchange rate exposure and banking system risk which is novel in the literature. We used an unique data for Brazilian banks exchange rate transactions combined with other micro and macro data. Our results indicate that banks improve its credit portfolio, free from regulatory investment, in periods when banks get foreign funding. Those results and future analysis and extensions of this work may better quantify this effect and serve as a basis for policy makers in terms of analysis of macroprudential policies.

Date: 2014-10
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