The new BIS working paper (pdf) by Stefan Avdjiev, Wenxin Du, Catherine Koch, and Hyun Song Shin really does seem to do the trick. Here is the abstract:
We document the triangular relationship formed by the strength of the US dollar, cross-border bank lending in dollars and deviations from covered interest parity (CIP). A stronger dollar goes hand-in-hand with bigger deviations from CIP and contractions of cross-border bank lending in dollars. Differential sensitivity of CIP deviations to the strength of the dollar can explain cross-sectional variations in CIP arbitrage profits. Underpinning the triangle is the role of the dollar as proxy for the shadow price of bank leverage.
I would put it this way (my interpretation, not theirs): liquidity is more expensive than you think, and leverage is more expensive too, as are risk-free assets. And hidden beneath the formal results of this paper is an optimistic message about the financial sector and also economic growth. If “riskless” arbitrage is that hard to pull off, just imagine what losses economies must be suffering due to inadequate arbitrage across the borrowing rate on regular funds and the rate of return on capital. And imagine how much gain there is to be had from making such (risky) arbitrage easier to pull off. On the down side, the implication is that intermediation today is more fragile than we had thought.
Izabella Kaminska has an important post on all of this. “The stronger dollar makes global financial intermediation more expensive” is an underrated idea that at least you should try on for size.