Information Asymmetry and Foreign Currency Borrowing by Small Firms

European Banking Center Discussion Paper No. 2011-026

CentER Working Paper Series No. 2011-099

22 Pages Posted: 5 Sep 2011 Last revised: 29 May 2013

See all articles by Steven Ongena

Steven Ongena

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

Pinar Yesin

Swiss National Bank

Martin Brown

University of St. Gallen

Date Written: February 19, 2013

Abstract

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.

Keywords: foreign currency borrowing, competition, banking sector, market structure

JEL Classification: G21, G30, F34, F37

Suggested Citation

Ongena, Steven R. G. and Yeşin, Pınar and Brown, Martin, Information Asymmetry and Foreign Currency Borrowing by Small Firms (February 19, 2013). European Banking Center Discussion Paper No. 2011-026. Available at SSRN: https://ssrn.com/abstract=1922646 or http://dx.doi.org/10.2139/ssrn.1922646

Steven R. G. Ongena (Contact Author)

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

Pınar Yeşin

Swiss National Bank ( email )

Boersenstrasse 15, P.O.Box
Zuerich, CH-8022
Switzerland
41-58-631-3969 (Phone)

HOME PAGE: http://www.pinaryesin.com

Martin Brown

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

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