US funding markets show signs of stability despite Russia sanctions

U.S. funding markets have remained relatively calm in recent days, easing the most immediate fears that sanctions against Russia could disrupt the basic functioning of the global financial system.

A big question facing Wall Street is how connected non-Russian banks are to sanctioned Russian institutions, and even unsanctioned Russian funding sources that banks might now want to avoid.

The short answer, analysts say, is that no one knows for sure. But there are reasons to think that the connections are relatively small. And so far, as short-term funding costs have soared, there have been few signs that banks are desperate for dollars, which analysts saw as an encouraging sign.

The United States and its allies have taken steps since late February to freeze foreign exchange reserves at the Russian central bank. They have also sanctioned Russian private sector banks, freezing assets and removing seven from Swift, the financial messaging infrastructure that serves as the blood of the global financial system.

Sanctions against the Russian central bank alone represent a major blow to the Russian economy, preventing the bank from selling dollars, euros or other currencies to help stabilize the ruble and combat the surge in the inflation. A potential risk is that such sanctions could remove a direct source of short-term funding for Western banks. They could also sow fear among Western banks, making them hesitant to lend to each other because they don’t know who might have exposure to Russia.

Conflicts such as Russia’s invasion of Ukraine have historically depressed stock prices and driven up the value of some commodities. The WSJ’s Dion Rabouin explains the investor psychology that moves financial markets. Photo: Justin Lane/EPA-EFE/Shutterstock

On Friday afternoon, short-term expectations for the spread between an average of unsecured interbank lending rates and the expected short-term rate set by the Fed – a measure of funding stress – stood at 0.31 percentage point, the highest since April 2020 and nearly tripling the level from a week earlier, according to Refinitiv IFR. But that was still well below the 0.6 percentage point level reached in March 2020, at the start of the Covid-19 pandemic, and even further below the 2.3 percentage point gap reached in beginning of the financial crisis of 2008-2009.

The cost of borrowing dollars against other currencies also increased but remained below crisis levels. The interest rate on three-month euro currency swaps, in which one party borrows a currency and lends its own in return, was minus 0.27 percentage points on Friday. While the negative number signals that holders of euros are paying a premium for dollars, it is less extreme than in March 2020, when the rate was minus 0.65 percentage points.

In another positive sign, banks have been slow to borrow through the Federal Reserve’s permanent repo facility, which the central bank created last year to support money markets. The Fed also said on Thursday that foreign central banks had borrowed about $293 million over the past week through the Fed’s dollar liquidity swap line, up from $225 million the previous week, but a small fraction of what had been borrowed at the start of the pandemic.

“We are still in watch and wait mode,” said Gennadiy Goldberg, senior US rates strategist at TD Securities. Still, he said, the data so far has provided “a small sigh of relief”, suggesting that any funding pressure from the sanctions “is relatively light”.

In a February 24 report, Credit Suisse analyst Zoltan Pozsar estimated that the Bank of Russia and Russian private-sector entities had lent around $200 billion in the currency swap market, thereby financing non-financial institutions. Russians by temporarily supplying them with US dollars in exchange for other currencies. He estimated that an additional $100 billion of Russian money was deposited in banks outside the country.


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His conclusion: “300 billion dollars deployed in the money markets is a lot” and “enough to drive up spreads in the funding markets”.

Still, other analysts have warned that it’s far from clear just how much Russia is involved in market funding and has likely become less involved in recent months, with both Russian and non-Russian institutions having reasons to move away from each other like an invasion. of Ukraine has become more likely.

Even $200 billion in currency swaps would still be a small fraction of what a Fed advisory group estimated to be a $23 trillion market, these analysts said. Additionally, banks are generally awash with cash equivalents thanks to the trillions of dollars the Fed has recently pumped into the financial system through its pandemic-era bond-buying program.

“We’re still in a massively excess liquidity market right now,” said Blake Gwinn, head of US rates strategy at RBC Capital Markets.

Whatever role Russia plays in a $23 trillion market, “it should be easy to replace,” he added.

—Caitlin Ostroff contributed to this article.

Write to Sam Goldfarb at

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