Working Paper: CEPR ID: DP7952
Authors: Martin Brown; Karolin Kirschenmann; Steven Ongena
Abstract: Motivated by concerns over foreign currency exposures of banks in Emerging Europe, we examine the currency denomination of business loans made in Bulgaria during the period 2003-2007. We analyze a unique dataset including information on the requested and granted currency for more than hundred thousand loans granted by one bank to sixty thousand different firms. This data set allows us to disentangle demand-side from supply-side determinants of foreign currency loans. We find that 32% of the foreign currency loans disbursed in our sample were actually requested in local currency by the firm. Our analysis suggests that the bank lends in foreign currency, not only to less risky firms, but also when the firm requests a long-term loan and when the bank itself has more funding in euro. These results imply that foreign currency borrowing in Eastern Europe is not only driven by borrowers who try to benefit from lower interest rates but also by banks hesitant to lend long-term in local currency and eager to match the currency structure of their assets and liabilities.
Keywords: banking; foreign currency debt
JEL Codes: F34; F37; G21; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| observable credit risk (G33) | likelihood of granting euro loans (F34) |
| longer relationship with bank (G21) | likelihood of granting euro loans (F34) |
| bank's supply-side influence (E58) | currency structure of lending portfolio (F34) |
| bank's funding structure (G21) | bank's lending behavior (G21) |
| firm characteristics (L20) | probability of requesting a loan in euros (F34) |
| foreign currency income (F31) | probability of requesting a loan in euros (F34) |
| lower distress costs (J32) | probability of requesting a loan in euros (F34) |
| larger loan requests (G51) | probability of requesting a loan in euros (F34) |
| higher disposable income (E25) | probability of requesting a loan in euros (F34) |
| not sole proprietorship (L39) | probability of requesting a loan in euros (F34) |