Working Paper: CEPR ID: DP14212
Authors: Friederike Niepmann; Tim Schmidteisenlohr
Abstract: When firms borrow in foreign currency, exchange rate changes can affect their ability to repay the debt. Loan-level data from U.S. banks' regulatory filings show that a 10 percent depreciation of the local currency quarter-to-quarter increases the probability that a firm becomes past due on its loans by 37 basis points for firms with foreign currency debt relative to those with local currency debt. Because firms do not perfectly hedge, exchange rate risk of the borrowers translates into credit risk for banks. Firms are more likely to borrow in foreign currency if they have foreign income and if a UIP deviation makes foreign currency loans cheaper. The paper establishes additional facts on large U.S. banks' international corporate loan portfolios, offering a more comprehensive perspective than syndicated loan data.
Keywords: cross-border banking; exchange rates; credit risk; corporate loans
JEL Codes: F31; G15; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 10% depreciation of the local currency (F31) | increase in probability of a firm with foreign currency loans becoming past due (F65) |
| 20% decrease in the local currency from loan origination to the first quarter (F31) | increase in probability of becoming past due for foreign currency borrowers (F31) |