Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks

34 Pages Posted: 23 Jan 2020

See all articles by Friederike Niepmann

Friederike Niepmann

Board of Governors of the Federal Reserve System; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: October 23, 2017

Abstract

When firms borrow in foreign currency but collect revenues in local currency, exchange rate changes can affect their ability to repay their debt. Using loan-level data from U.S. banks’ regulatory filings, this paper studies the effect of exchange rate changes on firms’ loan payments. A 10 percent depreciation of the local currency makes a firm with foreign currency debt 69 basis points more likely to become past due on its loans than a firm with local currency debt. This result implies that firms do not perfectly hedge against exchange rate risk and that this risk translates into credit risk for banks. The findings lend support to both the balance sheet channel and the financial channel of exchange rates.

Keywords: Cross-Border Banking, Exchange Rates, Credit Risk, Corporate Loans

JEL Classification: F310, G150, G210

Suggested Citation

Niepmann, Friederike and Schmidt-Eisenlohr, Tim, Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks (October 23, 2017). CESifo Working Paper Series No. 6700. Available at SSRN: https://ssrn.com/abstract=3075760

Friederike Niepmann

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tim Schmidt-Eisenlohr (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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