We study the impact of the U.S. money market fund reform implemented in October 2016 on global banks' funding supply and business activities. We show that the reform induced a large negative wholesale funding shock for global banks. In contrast to the conventional bank lending channel, the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision. We discuss the role of postcrisis liquidity regulations and unconventional monetary policy in explaining our findings, and implications for banks' business models and deposit competition.

We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk‐averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively countercyclical inflation ex post, which leads risk‐averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.