Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings

Thu, 01 Jan 2026 00:00:00 +0000

This paper investigates why non-U.S. central banks accumulate large holdings of dollar-denominated foreign exchange reserves, focusing on a previously under-emphasized motive: the currency mismatch of private-sector non-financial firms. When domestic firms borrow heavily in dollars despite having predominantly local operating revenues, the central bank faces potential liability as a dollar lender of last resort (DOLLR) in the event of a banking crisis coinciding with a dollar appreciation. The paper combines motivating empirical evidence with a formal theoretical model to analyze the optimal policy mix between ex ante financial regulation (bank capital requirements) and ex post reserve accumulation, and then extends the model to characterize global externalities arising from decentralized reserve-holding decisions.

Taehoon Kim | Macro Paper Warehouse

Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings