Bank balance-sheet limits drive global risk and dollar appreciation
Global financial intermediary constraints explain why U.S. uncertainty shocks increase worldwide corporate credit spreads, widen currency risk premia, and appreciate the dollar. Researchers Ozge Akinci, Sebnem Kalemli-Ozcan, and Albert Queralto quantified these dynamics in an August 2026 study.
Why frictionless asset pricing fails
Empirical local projections across 17 countries from 1990 to 2024 show that a one-standard-deviation U.S. uncertainty shock lifts the VIX by 15 percent, widens domestic and foreign corporate credit spreads by 0.3 percentage points, and elevates the foreign currency risk premium by 0.5 percentage points.
In standard frictionless models, heightened uncertainty lowers required returns and depreciates the dollar because precautionary saving depresses the safe rate.
Introducing leverage constraints on global intermediaries reverses both anomalies.
Constrained intermediaries face countercyclical net worth values, increasing the price of risk more than tenfold and contracting credit supply.
Arbitrage across borders and balance sheets
Because U.S.-based intermediaries arbitrage claims across borders, their balance-sheet constraints synchronize domestic and foreign asset valuations.
When risk rises, banks deleverage by shedding risky assets and foreign government bonds, transmitting higher risk premia across borders without requiring correlated dividend fundamentals.
Crucially, the model generates dollar appreciation without assuming special convenience yields for U.S. safe assets.
The dollar strengthens because currency risk premia adjust endogenously when intermediary equity is scarce.
No convenience yield required
The framework replaces ad-hoc safe-haven narratives with rigorous balance-sheet mechanics.
Yet relying on a single U.S. banking sector oversimplifies international funding networks.
Despite this limitation, the model provides the quantitative foundation that empirical macroeconomics long lacked.
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