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Information Asymmetry and Foreign Currency Borrowing by Small Firms

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  • Martin Brown
  • Steven Ongena
  • Pinar Yesin

Abstract

We model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs. Under perfect information, if foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and/or low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firm revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. Thus information asymmetry between banks and firms can be a potential driver of "dollarization" in credit markets.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2012-05.

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Length: null pages
Date of creation: 2012
Date of revision:
Handle: RePEc:snb:snbwpa:2012-05

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Keywords: foreign currency borrowing; competition; banking sector; market structure;

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References

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Cited by:
  1. Stephan Barisitz, 2011. "Nonperforming Loans in CESEE – What Do They Comprise?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 46-68.
  2. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1880-1897.

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