Finance Area Seminar: Umang Khetan

Umang Khetan

University of Iowa

Synthetic Dollar Funding

Date: Wednesday, January 14, 2026
Time: 11:30 am - 1:00 pm
Location: Bronfman building, Room 301

All are cordially invited to attend.

Abstract

I study how funding market frictions shape the pricing and availability of U.S. dollar credit. Global banks provide much of the world’s dollar credit. Yet, their access to conventional wholesale funding markets is increasingly constrained by tighter regulations. Using transaction-level data to jointly analyze funding markets, I show that foreign exchange swaps emerge as a key alternative when wholesale funding becomes scarce. Swaps enable banks to transform foreign currency into dollars, creating a supply of “synthetic” dollars while hedging currency risk. However, this workaround is costly: as suppliers of synthetic dollars face balance sheet costs, swap prices increase with demand. I causally show that a 10% rise in banks’ demand raises the relative price of synthetic dollars by 7 bps, providing a novel demand-driven mechanism for violations of covered interest parity – a fundamental no-arbitrage condition. Through the lens of a bank funding model calibrated to my estimates, I show that the resulting increase in intermediation costs ultimately necessitates central bank swap lines to sustain dollar credit supply. My findings highlight a key channel through which domestic funding frictions spill over to the international financial system.