Institutional Investors, the Dollar, and U.S. Credit Conditions Friederike Niepmann Tim Schmidt-Eisenlohr Federal Reserve Board SITE Session on The Dollar’s Special Status September 6, 2019 Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the Federal Reserve Board, or anyone affiliated with the Federal Reserve System. Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 1 / 49
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Institutional Investors, the Dollar, and U.S. Credit ... · Broad dollar index: Trade-weighted dollar index including all major trading partners Secondary market loan prices: Loan
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Institutional Investors, the Dollar, and U.S. CreditConditions
Friederike Niepmann Tim Schmidt-Eisenlohr
Federal Reserve Board
SITE Session onThe Dollar’s Special Status
September 6, 2019
Any opinions and conclusions expressed herein are those of the authors and donot necessarily represent the views of the Federal Reserve Board, or anyone
affiliated with the Federal Reserve System.
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 1 / 49
When dollar appreciates, U.S. corporate lending falls...
Changes in the dollar alone explain 18 percent of the variation in loanoriginations;A one-stand. dev. change (+2.5 point) in the broad dollar index isassociated with 10 percent lower loan issuance
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 2 / 49
Change in weighted-average probability of default of new loansregressed on changes in the dollar index
U.S. banks shift to safer borrowers when the dollar appreciates
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 3 / 49
The secondary market channel
Dollar ↑Secondary
Market Demand
US Banks’ Credit
StandardsU.S. Credit ↓↓ ↑
1 Dollar appreciates
2 Institutional investors reduce their demand for U.S. corporate loans on thesecondary market⇒ Secondary market prices fall / bid-ask spreads rise
3 U.S. banks tighten credit standards
4 U.S. corporate lending goes down
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 4 / 49
Larger role of non-bank investors for U.S. corporate loans
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U.S. ban
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Total value
of b
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Year
Total Value of Syndicated Loans Bought in the Secondary Market
U.S. Banks Mutual Funds CLOs
Other U.S. Entities Foreign Entities Share of U.S. banks
Syndicated lending has grown substantially since the 2000s but especiallysince the Global Financial Crisis (Irani, Iyer, Meisenzahl and Peydro (2018)).
Banks underwrite loans and sell most in the secondary market to non-bankinvestors (31 percent bought by CLOs, 22 percent bought by mutual funds)within 30 days of origination (Lee, et. al (2017)).
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 5 / 49
Implications
1 Shift of traditional financial intermediation to non-bank sector hasmajor implications for the supply of credit in the U.S.
I Changes in institutional investors’ demand for corporate loans havefirst-order effects on banks’ supply of credit to U.S. firms
I Institutional investors behave differently from banks, are sensitive tothe dollar ⇒ Macro-financial relationships change
2 Credit supply to U.S. firms is more affected by foreign developmentsthan generally appreciated
I Dollar appears to be a “barometer of the risk-taking capacity in globalcapital markets” (Avdjiev et al. 2018)
I U.S. also subject to global financial cycle independent of U.S. monetarypolicy and the VIX
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 6 / 49
(Incomplete) Related literature
The dollar and cross-border flows: Bruno and Shin (2014), Avdjievet al. (forthcoming), Camanho et. al. (2018), Jiang et al. (2019),Lilley et al. (2019)
Transmission through syndicated loan market: Irani et al. (2018),Lee et al. (2015), Lee at al. (2017), Bruche et al. (2017)
Liquidity and prices of U.S. corporate loans on the secondarymarket: Demsetz (2000), Ivashina and Sun (2011), Santos and Shao(2018)
Intermediary asset pricing: Gabaix and Maggiori (2015), Du et al.(2017), Adrian et al. (2014), Jiang et al. (2018), He et al. (2017),Malamud and Schrimpf (2016)
Special role of the dollar: Gopinath and Stein (2018), Maggiori etal. (2018), Du et al. (2018)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 7 / 49
Data
U.S. loan-level data, 2011:Q3-2017:Q4I FR Y-14Q reports for 30-40 major U.S. banks since 2011:Q3I Corporate loans and leases above $1 millionI Origination date, maturity, bank’s risk rating, loan amount, currency
Senior Loan Officer Opinion Survey, 1990:Q1-2017:Q4I Questions about changes in demand and supply of loans, including
credit standards and reasons for changes
Broad dollar index: Trade-weighted dollar index including all majortrading partners
Dollar appreciation increases the net percentage of banks that said that theytightened credit standards (beta coefficients of 15 pct versus 19 pct for log VIX)
Relationship holds outside of crises/recessions (we exclude U.S. NBER recessions)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 19 / 49
Tighter credit standards reduce lending
Dollar ↑Secondary
Market Demand
US Banks’ Credit
StandardsU.S. Credit ↓↓ ↑
When banks tighten credit standards, loan volumes decline
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 20 / 49
Tighter credit standards reduce lending
Log Util. Exp.
Easing 0.230***(0.0728)
Tight. -0.0309(0.0970)
L Easing 0.156**(0.0761)
L Tight. -0.0998(0.101)
Observations 655R2 0.764
When U.S. banks ease credit standards, lending volumes rise
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 21 / 49
Excluding Alternative Explanations
Secondary Market
CLOs
Mutual Funds Banks Firms
Dollar
X X
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 22 / 49
Excluding alternative explanations
Excluding link between dollar and demand for loans:
1 Not related to trade intensities of borrowers. Table 14
2 Controlling for credit demand does not affect results. Tables 15 and 16
3 Cross-border lending and domestic lending react to the dollar to thesame extent (no differences between EMEs and AFEs either). Tables 19
Excluding link between dollar and direct credit supply of banks:
1 Credit risk of existing loans unrelated to dollar. Tables 17
2 Banks’ foreign assets do not explain differences in sensitivities to thedollar across banks. Tables 18
3 Rates U.S. banks pay for money market mutual fund funding fallwhen the dollar appreciates. Tables 20
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 23 / 49
Effect of dollar also reflected in bond yields
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 24 / 49
U.S. corporate bond yields also move with dollar
(1)Baseline
D Dollar -0.0229(0.0175)
Rating X D Dollar 0.0126**(0.00616)
Observations 3683R2 0.185
Risky U.S. corporate bond yields with BB rating or below increasewith the dollar
Extensive controls included but not shown
Credit conditions deteriorate broadly except for most highly ratedfirms with access to bond markets
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 25 / 49
Are U.S. bonds more or less responsive than foreign bonds?
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 26 / 49
EPFR flows into U.S. and foreign bonds
(1) (2) (3) (4) (5) (6) (7)US EME AFE EME Dollar EME Local AFE Dollar AFE Local
D Dollar -0.000708* -0.00329** -0.00296*** -0.00470*** -0.00181 -0.00440*** -0.00293(0.000390) (0.00146) (0.000941) (0.00162) (0.00172) (0.00128) (0.00238)
Lag Av. Perf. 0.00297*** 0.00429*** 0.00504*** 0.00418*** 0.00483*** 0.00538*** 0.00637(0.000626) (0.000990) (0.00165) (0.00105) (0.00134) (0.00187) (0.00430)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 27 / 49
What drives the correlation between the dollar and investors’ riskappetite?
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 28 / 49
Exploring the mechanism
Foreign mon. policy affects U.S. credit conditions through theexchange rate
I Instrumenting the dollar exchange rate with the dollar response toforeign monetary policy announcements from Cieslak and Schrimpf(2017) IV Results
F Foreign monetary policy does not reveal information about U.S.economy
F Interest rate spillovers into the U.S., if any, should have opposite effecton U.S. credit conditions compared to the channel we propose
Post global financial crisis (GFC), the dollar exchange rate vis-a-visEMEs drives all the results
Inclusion of existing measures of risk aversion does not eliminatesignificance of the dollar (variance risk premium, treasury basis etc.,principal component of yen and CHF movements)
I If dollar captures merely investors’ risk aversion, dollar has to be thebest measure (at least since GFC)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 29 / 49
Concluding remarks
Findings
Credit conditions for U.S. firms tighten when dollar appreciatesbecause institutional investors pull money from market for bank loans
Distinct from traditional channels that link the dollar to interest rates,terms of trade or U.S. economic performance
U.S. loan market subject to same forces as lower-grade corporatebonds and EME bonds
Conclusions
U.S. credit conditions are more affected by international developments(the global financial cycle) than generally appreciated
Due to growth of “shadow banking”, which changes macro-financerelationships
Authorities need to pay closer attention to “shadow banks” to ensurestable supply of credit
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 30 / 49
THANK YOU!
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 31 / 49
US funds
(1) (2) (3) (4) (5) (6)Bank Loan Blend Curr. Hard Curr. High Yield Infl. Prot. IT
D Dollar -0.00506** -0.00161 -0.00288* -0.00178* -0.00107 0.000490(0.00230) (0.00129) (0.00170) (0.000918) (0.00112) (0.000756)
(1) (2) (3) (4) (5) (6)IT Corp. IT Gov. Local Curr. LT Bond LT Corp. LT Gov.
D Dollar 0.000743 0.00234* -0.0106* -0.00184** 0.0000844 -0.00381(0.00151) (0.00134) (0.00610) (0.000815) (0.00206) (0.00290)
(1) (2) (3) (4) (5) (6)Morgage Backed Municipal Bond ST Bond ST Corp. ST Gov. Total Return
D Dollar -0.000237 0.000135 0.000823 -0.000875 -0.00584** -0.00202***(0.00128) (0.000870) (0.000870) (0.00144) (0.00231) (0.000650)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 32 / 49
Foreign Funds - all
(1) (2) (3) (4) (5) (6)Bank Loan Blend Curr. Hard Curr. High Yield Infl. Prot. IT
D Dollar -0.00206 -0.00126 -0.00430*** -0.00560*** -0.00412** 0.000453(0.00348) (0.00179) (0.00143) (0.00161) (0.00189) (0.000978)
(1) (2) (3) (4) (5) (6)IT Corp. IT Gov. Local Curr. LT Bond LT Corp. LT Gov.
D Dollar -0.000717 0.000158 -0.00639** -0.000482 0.00410*** 0.00351(0.00195) (0.00187) (0.00260) (0.00193) (0.00156) (0.00323)
(1) (2) (3) (4) (5) (6)Morgage Backed Municipal Bond ST Bond ST Corp. ST Gov. Total Return
D Dollar 0.00636** 0.100 -0.0102** 0.00392* -0.00277 -0.00312**(0.00254) (.) (0.00481) (0.00225) (0.00244) (0.00147)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 33 / 49
Foreign Funds - Dollar denominated
(1) (2) (3) (4) (5) (6)Bank Loan Blend Curr. Hard Curr. High Yield Infl. Prot. IT
D Dollar -0.00779 -0.00208 -0.00327** -0.00649*** -0.01000*** -0.000169(0.00692) (0.00173) (0.00148) (0.00186) (0.00368) (0.00136)
(1) (2) (3) (4) (5) (6)IT Corp. IT Gov. Local Curr. LT Bond LT Corp. LT Gov.
D Dollar -0.00431 0.00587** -0.0128*** 0.00861 0.00469 0.00809*(0.00500) (0.00239) (0.00356) (0.00735) (0.00337) (0.00435)
(1) (2) (3) (4) (5) (6)Morgage Backed Municipal Bond ST Bond ST Corp. ST Gov. Total Return
D Dollar 0.0741 0.100 -0.00643 0.00284 -0.00649** -0.00428**(0.0570) (.) (0.00573) (0.00457) (0.00303) (0.00197)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 34 / 49
Foreign Funds - non-Dollar denominated
(1) (2) (3) (4) (5) (6)Bank Loan Blend Curr. Hard Curr. High Yield Infl. Prot. IT
D Dollar -0.00183 0.0000489 -0.00638*** -0.0113 -0.00364** 0.00198*(0.00344) (0.00293) (0.00189) (0.00948) (0.00171) (0.00104)
(1) (2) (3) (4) (5) (6)IT Corp. IT Gov. Local Curr. LT Bond LT Corp. LT Gov.
D Dollar -0.000341 -0.00111 -0.00224 -0.000739 0.00232 0.00442(0.00197) (0.00211) (0.00267) (0.00131) (0.00168) (0.00355)
(1) (2) (3) (4) (5) (6)Morgage Backed Municipal Bond ST Bond ST Corp. ST Gov. Total Return
D Dollar 0.00467** -0.00690** 0.00403 0.00175 0.00315 0.0134(0.00201) (0.00311) (0.00255) (0.00382) (0.00446) (0.0172)
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 35 / 49
EME Funds
(1) (2) (3) (4) (5) (6)Hard Dollar Hard Local Local Dollar Local Local Blend Dollar Blend Local
D Dollar -0.00311** -0.00638*** -0.0130*** -0.00224 -0.00217 0.0000489(0.00141) (0.00189) (0.00368) (0.00267) (0.00146) (0.00293)
Observations 142 142 142 142 142 142
R2 0.465 0.261 0.202 0.140 0.197 0.157
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 36 / 49
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 45 / 49
Correlation between U.S. loan originations and the dollar
-4-2
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Cha
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-.4-.2
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.4Lo
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ange
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an o
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2011q3 2013q1 2014q3 2016q1 2017q3quarter
Log change in origin. Change in broad dollar
Quarterly Y-14 loan originations aggregated over 16 banks
A one-stand. dev. change (+2.5 point) in the broad dollar index isassociated with 10 percent lower loan issuance
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 46 / 49
Dollar predicts Chicago Financial Conditions Index
-.02
0
.02
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Impulse Response Function of D NFCI Credit to D Dollar, post GFC
95% CI Cumulative Orthogonalized IRF
Months
Graphs by irfname, impulse variable, and response variable
Broad dollar predicts macro-financial conditions, controlling for allstandard factorsSVAR with order: D FF Rate; D Term Spread; D EBP; D Ln(Vix); DLn(CPI); D Ln(Indpro); D Ln(Nonfarm); D Dollar; D NFCI CREDITMonthly, post-GFC with two lags
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 47 / 49
Splitting the dollar into an EME and an AFE index
(1) (2) (3) (4) (5) (6)SL. Pre-2008 SL. Post-2008 SL. Reason Price Index Price Bid-Ask Spr.
D Dollar AFE 1.330** -0.707 -0.00317 -0.000425 -0.000379*** 0.000805(0.528) (0.440) (0.00576) (0.000394) (0.0000330) (0.00185)
D Dollar EME -0.0871 1.452** -0.0112 -0.00153*** -0.00108*** 0.00658**(0.327) (0.541) (0.00672) (0.000533) (0.0000361) (0.00260)
Institutional investors appear to respond mostly to EME dollar index, especiallysince the GFC
Consistent with idea that institutional investors de-risk when dollar appreciatesbecause of their holdings of dollar denominated EME debt, which gets riskier
Niepmann / Schmidt-Eisenlohr (FRB) Investors, the Dollar, and U.S. Credit Cond. 48 / 49
EPFR funds flows and the EME vs. AFE dollar
U.S. Domestic Emerging Markets
(1) (2) (3) (4) (5)Bank Loan Bank Loan Bank Loan Hard Currency Local Currency
D Dollar EME -0.00759*** -0.00667** -0.00656*** -0.00662*** -0.00934***(0.00276) (0.00265) (0.00221) (0.00118) (0.00291)
D Dollar AFE 0.00146 0.00207 0.00139 0.00186 0.00117(0.00342) (0.00330) (0.00260) (0.00120) (0.00296)
Lag Av. Perf. 0.00616** 0.00142 0.00375*** 0.00443***(0.00274) (0.00289) (0.000812) (0.00157)
D Log Vix 0.0175 -0.0263*** 0.0309(0.0232) (0.00940) (0.0188)
D Excess BP 0.0274* -0.00182 0.00447(0.0149) (0.00635) (0.0132)
D Fed Funds R. -0.0463*** -0.00482 0.0194(0.0161) (0.00925) (0.0215)
D Term Spread 0.103*** -0.0224*** -0.00420(0.0176) (0.00834) (0.0177)
D Unempl. Outl. -0.0487* 0.0156 -0.0399(0.0266) (0.0130) (0.0364)