COVID-19 Exposes Asian Banks’ Vulnerability to US Dollar Funding

Abstract

The unfolding coronavirus disease (COVID-19) pandemic has precipitated a sharp projected slowdown in the region’s growth, raising the specter of financial instability. Past episodes of financial crisis highlighted the region’s financial vulnerability given greater interconnectedness in global financial markets and institutions. The rapid globalization of financial markets, substantial short-term capital flows, uneven development of local capital markets, and deficient currency hedging mechanisms—combined with the region’s continued reliance on foreign borrowing and investment and insufficient crisis control mechanisms—underpinned the unfavorable dynamics of financial volatility during times of economic uncertainty and stress.