Partisan Depositor Responses to a Currency Shock

57 Pages Posted: 7 Apr 2021

See all articles by Xiangyang Gao

Xiangyang Gao

The University of Hong Kong - University of Hong Kong

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Vesa Pursiainen

University of St. Gallen

Yuchen Xu

Peking University HSBC Business School

Date Written: April 6, 2021

Abstract

Depositor responses to a large currency shock vary depending on political views. Triggered by a combination of economic policies and a geopolitical conflict with the U.S., the Turkish lira depreciated 14% against the U.S. dollar on August 10, 2018. Using unique depositor-level micro data from a Turkish bank, we find that households significantly increase their share of deposits held in foreign currency after the currency shock, and the shift to FX is most pronounced in areas with low support for president Erdogan, while people in areas with high support are significantly less likely to move from lira to FX. These shifts to FX persist long after the shock, despite the lira regaining much of its lost value. The change in depositor currency preferences is associated with an increase in foreign-currency lending and increasing currency mismatches on Turkish banks' balance sheets, which translate into differences in bank profitability.

Keywords: currency shock, household behavior, bank deposits, exchange rate risk

JEL Classification: D14, D81, E71

Suggested Citation

Gao, Xiangyang and Lin, Chen and Pursiainen, Vesa and Xu, Yuchen, Partisan Depositor Responses to a Currency Shock (April 6, 2021). Available at SSRN: https://ssrn.com/abstract=3820498 or http://dx.doi.org/10.2139/ssrn.3820498

Xiangyang Gao

The University of Hong Kong - University of Hong Kong

Pokfulam Road
Hong Kong, Hong Kong
China

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Vesa Pursiainen (Contact Author)

University of St. Gallen ( email )

Swiss Institute of Banking and Finance
Unterer Graben 21
St.Gallen, 9000
Switzerland

Yuchen Xu

Peking University HSBC Business School ( email )

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