Exchange Rate Risk, Banks' Currency Mismatches, and Credit Supply

72 Pages Posted: 18 Nov 2019 Last revised: 1 Apr 2021

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: March 29, 2021

Abstract

This paper shows that banks have unbalanced on- and off-balance-sheet currency exposure, which affects the economy profoundly when the inherent exchange rate risk materializes. Even if banks’ net foreign currency exposure is zero in the aggregate, across-banks heterogeneity can lead to a reduction in economic activity: an adverse exchange rate shock induces losses from currency mismatches, leading to a contraction in credit supply as capital constraints bind. This hampers the ability of firms (especially small ones) to borrow and invest, including those unlikely to have had any exchange rate exposure to begin with. These findings highlight that exchange rate risk in combination with currency mismatches at banks is a source of shock propagation with severe macroeconomic implications.

Keywords: Currency Mitmatch, Credit Supply, Foreign Exchange Risk, Financial Intermediation, Risk Migration, Financial Stability

JEL Classification: D53, D61, F31, G15, G21, G32

Suggested Citation

Abbassi, Puriya and Bräuning, Falk, Exchange Rate Risk, Banks' Currency Mismatches, and Credit Supply (March 29, 2021). Available at SSRN: https://ssrn.com/abstract=3483234 or http://dx.doi.org/10.2139/ssrn.3483234

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
55
Abstract Views
637
rank
379,355
PlumX Metrics