Vulnerable funding in the global economy

What happens to credit around the world when financial conditions in the United States deteriorate? And which countries are most exposed to these shocks? These questions are central to understanding how financial crises propagate in a highly interconnected global economy.

In the study “Vulnerable funding in the global economy”, published in the Journal of Banking & Finance, Volume 169, December 2024, our researcher Helena Chuliá, alongside with our PhD alumnus Ignacio Garrón (Universidad Carlos III de Madrid) and Jorge M. Uribe (Universitat Oberta de Catalunya) extend the literature on vulnerable growth to examine how US financial shocks affect the distribution of real credit growth across countries. The authors introduce the concept of vulnerable funding, capturing how financial stress originating in the US disproportionately impacts the most adverse credit growth outcomes abroad.

Their central finding is clear. A tightening of US financial conditions leads to a decline in real credit growth in other countries, with effects that are significantly stronger at the lower quantiles of the credit growth distribution. In other words, US financial shocks not only slow global credit on average, but they also increase the risk of severe credit contractions, with effects that can persist for up to three years.

The analysis also uncovers substantial cross-country heterogeneity. Economies with lower credit-to-GDP ratios and those more financially exposed to the US—through higher levels of US investment relative to GDP—are especially vulnerable. These characteristics amplify the transmission of US financial weakness into domestic credit markets.

Methodologically, the paper relies on quantile regressions in the spirit of the Growth-at-Risk framework and uses a rich dataset covering 45 countries over nearly six decades. Even after controlling for global real and financial factors, US financial conditions remain a powerful predictor of downside risks to credit growth worldwide.

Overall, the study highlights the crucial role of funding markets in transmitting and amplifying global financial shocks. Its findings underscore the importance for policymakers and regulators to closely monitor credit and funding vulnerabilities, particularly during periods of financial stress in the United States, and to respond proactively to mitigate adverse spillovers to domestic economies.

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