Marco Garofalo
@marcogarofalo.bsky.social
Senior economist @bankofengland PhD student @OxfordEconDept @UniofOxford ⚽️ Long-suffering AS Roma fan 🇮🇹🇳🇱🇪🇺🇬🇧 RTs ≠ endorsements, any views my own.
Website: https://sites.google.com/view/marco-garofalo/home
Website: https://sites.google.com/view/marco-garofalo/home
Link to paper w/ my amazing co-authors
Giovanni Rosso and Roger Vicquery
ora.ox.ac.uk/objects/uuid...
Giovanni Rosso and Roger Vicquery
ora.ox.ac.uk/objects/uuid...
ora.ox.ac.uk
June 21, 2025 at 9:45 AM
Link to paper w/ my amazing co-authors
Giovanni Rosso and Roger Vicquery
ora.ox.ac.uk/objects/uuid...
Giovanni Rosso and Roger Vicquery
ora.ox.ac.uk/objects/uuid...
ICYMI: @davidbeckworth.bsky.social @helene-rey.bsky.social @danielmcdowell.bsky.social @apferrero.bsky.social @antoineberthou.bsky.social @edwardfishman.bsky.social @himself.bsky.social @mmaggiori.bsky.social @weisenthal.bsky.social @guntramwolff.bsky.social @rebeccawire.bsky.social
April 15, 2025 at 5:57 PM
Specifically, our main innovation is to model sanctions as a currency-specific wedge on assets with different denominations. As US sanctions tighten the constraint on USD assets, financial intermediaries reallocate their portfolios towards other currencies.
[10/10]
[10/10]
April 15, 2025 at 5:57 PM
Specifically, our main innovation is to model sanctions as a currency-specific wedge on assets with different denominations. As US sanctions tighten the constraint on USD assets, financial intermediaries reallocate their portfolios towards other currencies.
[10/10]
[10/10]
We plug this insight into a novel 3-country 3-currency framework, where financial sanctions are financial frictions.
[9/10]
[9/10]
April 15, 2025 at 5:57 PM
We plug this insight into a novel 3-country 3-currency framework, where financial sanctions are financial frictions.
[9/10]
[9/10]
In other words: financial sanctions created a new currency-circuit-specific friction.
The risk of counterparts being cut off from the dollar payment system led to a rebalancing of portfolios towards the euro.
[8/10]
The risk of counterparts being cut off from the dollar payment system led to a rebalancing of portfolios towards the euro.
[8/10]
April 15, 2025 at 5:57 PM
In other words: financial sanctions created a new currency-circuit-specific friction.
The risk of counterparts being cut off from the dollar payment system led to a rebalancing of portfolios towards the euro.
[8/10]
The risk of counterparts being cut off from the dollar payment system led to a rebalancing of portfolios towards the euro.
[8/10]
Why the euro? We argue that the threat of US extra-territorial sanctions targeting users of the USD international payment system increased “settlement risk” for USD transactions, relative to EUR.
[7/10]
[7/10]
April 15, 2025 at 5:57 PM
Why the euro? We argue that the threat of US extra-territorial sanctions targeting users of the USD international payment system increased “settlement risk” for USD transactions, relative to EUR.
[7/10]
[7/10]
Even more striking: the shift to euro lending happened regardless of the bank’s national jurisdiction, i.e. whether the ultimate parent was American, European/G7, or from a non-sanctioning country.
[6/10]
[6/10]
April 15, 2025 at 5:57 PM
Even more striking: the shift to euro lending happened regardless of the bank’s national jurisdiction, i.e. whether the ultimate parent was American, European/G7, or from a non-sanctioning country.
[6/10]
[6/10]
So, banks didn’t necessarily leave, but they changed currency …
[5/10]
[5/10]
April 15, 2025 at 5:57 PM
So, banks didn’t necessarily leave, but they changed currency …
[5/10]
[5/10]
We zoom in on the UK using confidential bank-level data, and show that most of the new euro lending came from the same banks that had decreased their USD lending: both banks that started lending in EUR (🟨👇), and those already lending in EUR which started to lend more
(🟦👇).
[4/10]
(🟦👇).
[4/10]
April 15, 2025 at 5:57 PM
We zoom in on the UK using confidential bank-level data, and show that most of the new euro lending came from the same banks that had decreased their USD lending: both banks that started lending in EUR (🟨👇), and those already lending in EUR which started to lend more
(🟦👇).
[4/10]
(🟦👇).
[4/10]
But this aggregate picture disguises a striking underlying fact: the share of cross-border lending to Russia in US dollars fell from 65% to 25%. Meanwhile, euro-denominated lending rose from 20% to 45%. (Source: BIS LBS)
How did that happen?
[3/10]
How did that happen?
[3/10]
April 15, 2025 at 5:57 PM
But this aggregate picture disguises a striking underlying fact: the share of cross-border lending to Russia in US dollars fell from 65% to 25%. Meanwhile, euro-denominated lending rose from 20% to 45%. (Source: BIS LBS)
How did that happen?
[3/10]
How did that happen?
[3/10]
Following the 2014 invasion of Crimea and the imposition of financial sanctions on Russia, global cross-border lending to Russia declined significantly. (Source: BIS LBS)
[2/10]
[2/10]
April 15, 2025 at 5:57 PM
Following the 2014 invasion of Crimea and the imposition of financial sanctions on Russia, global cross-border lending to Russia declined significantly. (Source: BIS LBS)
[2/10]
[2/10]
