Foreign Currency Lending
69 Pages Posted: 9 Aug 2018 Last revised: 20 Sep 2018
Date Written: July 26, 2018
Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads by approximately 20 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately USD 2.55 million for loans of average size and duration. We show that our finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets. Borrowers can lower the extra cost by forming strong lending relationships with their banks.
Keywords: Global Syndicated Loans, Foreign Currency Lending, Exchange Rate Risk, Bank Market Power, Relationship Lending
JEL Classification: G21, F31, F33, F34
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