Information Asymmetry and Foreign Currency Borrowing by Small Firms
Tilburg University - CentER, European Banking Center (EBC); Centre for Economic Policy Research (CEPR)
Swiss National Bank
University of St. Gallen, Swiss Institute of Banking and Finance
February 19, 2013
European Banking Center Discussion Paper No. 2011-026
CentER Working Paper Series No. 2011-099
We model how an information asymmetry between the lending bank and the applying firm about the currency structure of firm revenues may affect loan currency choice. Our framework features a trade-off between the lower cost of foreign currency debt and the costs of currency induced loan default. We show that under imperfect information about firm revenues, more local earners choose foreign currency loans, as they do not bear the full cost of the corresponding credit risk. This result is consistent with recent evidence showing that information asymmetries may increase foreign currency borrowing by retail clients in the transition economies.
Number of Pages in PDF File: 22
Keywords: foreign currency borrowing, competition, banking sector, market structure
JEL Classification: G21, G30, F34, F37working papers series
Date posted: September 5, 2011 ; Last revised: February 20, 2013
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