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

64 Pages Posted: 14 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: December 2019

Abstract

When firms borrow in foreign currency, exchange rate changes can affect their ability to repay the debt. Loan-level data from U.S. banks' regulatory filings show that a 10 percent depreciation of the local currency quarter-to-quarter increases the probability that a firm becomes past due on its loans by 37 basis points for firms with foreign currency debt relative to those with local currency debt. Because firms do not perfectly hedge, exchange rate risk of the borrowers translates into credit risk for banks. Firms are more likely to borrow in foreign currency if they have foreign income and if a UIP deviation makes foreign currency loans cheaper. The paper establishes additional facts on large U.S. banks' international corporate loan portfolios, offering a more comprehensive perspective than syndicated loan data.

Keywords: corporate loans, credit risk, cross-border banking, Exchange Rates

JEL Classification: F31, G15, G21

Suggested Citation

Niepmann, Friederike and Schmidt-Eisenlohr, Tim, Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks (December 2019). CEPR Discussion Paper No. DP14212. Available at SSRN: https://ssrn.com/abstract=3518550

Friederike Niepmann (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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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

Board of Governors of the Federal Reserve System ( email )

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

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