Norwegian banks' foreign currency funding of NOK assets
- Jermund L. Molland
- Staff Memo
Norwegian banking groups fund NOK assets by borrowing in foreign currency. Banking groups use currency swap markets to convert foreign exchange to NOK and manage their liquidity in various currencies over time. This strategy makes the currency swap market a key component of the financial system. In this article, I will examine how banking groups convert foreign exchange to NOK, the risks associated with the various strategies and the vulnerabilities in the financial system that might arise from the use of currency swaps. In conclusion, I discuss why banking groups have behaved in this manner and what may be done to possibly modify these strategies or reduce attendant vulnerabilities.
Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.
ISSN 1504-2596 (online)