Bank for International Settlements Committee on the Global Financial System publishes report on foreign currency funding risk and cross-border liquidity

The Bank for International Settlements Committee on the Global Financial System (CGFS) has published a working group report analysing how foreign currency funding shortages can amplify financial stress and how cross-border liquidity flows behave when external funding markets are impaired. The paper focuses on what existing data show about intermediaries’ exposures and on the resilience of intragroup cross-border transfers through “internal capital markets”, alongside discussion of central bank liquidity backstops and prudential measures. The report treats the US dollar, euro, Swiss franc, pound sterling and Japanese yen as foreign currencies and highlights the US dollar’s central role in the global financial system. It finds that banks often use derivatives-based hedging to reduce currency mismatches, which can mitigate foreign currency funding risks but may create rollover risks, and that foreign currency funding is typically raised at bank headquarters and then allocated via intragroup transfers. Given this structure, impaired functioning of internal capital markets could have adverse financial stability implications, and under severe stress central bank foreign currency liquidity facilities are positioned as a key last-resort measure. The report, prepared by a CGFS Working Group co-chaired by Stephanie Curcuru and Antoine Martin, also points to the need to close data gaps to improve global mapping of exposures to foreign currency funding risks.