Deleveraging and Foreign Currency Loan Conversion Programs in Europe

Abstract

This paper first reviews the developments in the size and composition of the European banking sectors’ balance sheets since the Global Financial Crisis, and then assesses the impact of foreign currency loan conversion programs on systemic risk. Aggregate data from 2009Q1 to 2019Q3 indicate three major developments. First, the deleveraging process in Europe has been sizeable, while credit growth may be hampered in several countries. Secondly, macroprudential measures and conversion programs have only partially achieved their goal of lowering financial dollarization in Central and Eastern Europe. Lastly, systemic risk remains elevated in the non-euro area.

Keywords: Deleveraging, foreign currency lending, financial dollarization, loan conversion programs, systemic risk

JEL Classification: F15, F21, F32, F36, G21