Non-US global banks link dollar funding to global house price synchronization
A Bank for International Settlements (BIS) working paper reveals how non-US global banks transmit US dollar funding conditions to international housing markets. Their exposure to dollar funding explains the significant co-movement of house prices across countries.
The dollar's global housing footprint
A new BIS working paper identifies a novel international spillover channel linking US dollar funding conditions to global housing markets through non-US global banks.
These banks, crucial intermediaries in the global financial system, depend significantly on dollar funding for their dollar-denominated loans.
When the dollar appreciates, it reduces their risk-taking capacity, compelling them to cut foreign lending.
This effect is more pronounced for banks with a higher bilateral US treasury basis, which measures their cost disadvantage in synthetic dollar funding.
As these banks reduce foreign credit, counterparty banks in borrowing countries curtail domestic mortgage lending, leading to downward pressure on house prices.
This mechanism, termed 'dollar co-dependence,' explains the observed international synchronization of house prices.
Global banks as transmission belts
The paper builds on the 'double-decker' structure of the global banking system, highlighting how banks headquartered in advanced non-US economies like Germany, France, the UK, Switzerland, and Japan dominate global foreign credit.
It is the first to empirically explore how this global banking network structure influences the synchronization of real outcomes, specifically real estate markets.
The analysis contributes to a growing literature on the central role of non-US global banks in the international financial system.
Empirically, the study first shows individual countries' house price growth depends on dollar funding conditions and their indirect dollar funding exposure, then demonstrates dollar co-dependence as a key driver of house price synchronization.
Beyond common lenders
This research significantly advances understanding of global financial interconnectedness by identifying a novel spillover channel.
Its focus on heterogeneous dollar funding exposures offers a crucial refinement to existing theories of house price synchronization.
Policymakers should integrate this dollar co-dependence into macro-prudential frameworks to better manage systemic risks.