Foreign Currency Loans - Demand or Supply Driven?

50 Pages Posted: 16 Aug 2010

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Karolin Kirschenmann

Centre for European Economic Research (ZEW)

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2010

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 Classification: F34, F37, G21, G30

Suggested Citation

Brown, Martin and Kirschenmann, Karolin and Ongena, Steven R. G., Foreign Currency Loans - Demand or Supply Driven? (August 2010). CEPR Discussion Paper No. DP7952. Available at SSRN: https://ssrn.com/abstract=1658259

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Karolin Kirschenmann

Centre for European Economic Research (ZEW) ( email )

Germany
+496211235351 (Phone)

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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