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The cost of foreign-currency lending

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  • Delis, Manthos D.
  • Politsidis, Panagiotis N.
  • Sarno, Lucio

Abstract

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 somewhere in the range between 5.5 and 16.1 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately 1 to 3 USD million for loans of average size and duration. We also show that this finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets, and that borrowers can lower the extra cost by forming strong lending relationships with their banks.

Suggested Citation

  • Delis, Manthos D. & Politsidis, Panagiotis N. & Sarno, Lucio, 2022. "The cost of foreign-currency lending," Journal of Banking & Finance, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426621003496
    DOI: 10.1016/j.jbankfin.2021.106398
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    More about this item

    Keywords

    Global syndicated loans; Foreign-currency lending; Exchange rate risk; Bank market power; Relationship lending;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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