IDEAS home Printed from https://ideas.repec.org/p/zbw/gdec10/8.html
   My bibliography  Save this paper

Foreign Currency Loans - Demand or Supply Driven?

Author

Listed:
  • Brown, Martin
  • Kirschenmann, Karolin
  • Ongena, Steven

Abstract

Motivated by current concerns over foreign currency exposures in emerging economies, we examine the currency denomination of business loans made in Bulgaria prior to the current crisis. We analyze information on the requested and granted currency for more than hundred thousand loans granted by one bank to sixty thousand different firms during the period 2003- 2007. This unique data set allows us to disentangle demand-side from supply-side determinants of foreign currency loans. We find that the bank in our sample often grants loans in foreign currency even when a firm requests a loan in local currency. The bank lends in foreign currency, not only to less risky firms, but also when the firm requested a large or long-term loan and after the bank itself received more funding in euro. These results suggest that foreign currency borrowing in Eastern Europe is not only be driven by borrowers who try to benefit from lower interest rates but may be partly supply-driven with banks hesitant to lend long-term in local currency and eager to match the currency structure of their assets and liabilities.

Suggested Citation

  • Brown, Martin & Kirschenmann, Karolin & Ongena, Steven, 2010. "Foreign Currency Loans - Demand or Supply Driven?," Proceedings of the German Development Economics Conference, Hannover 2010 8, Verein für Socialpolitik, Research Committee Development Economics.
  • Handle: RePEc:zbw:gdec10:8
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/40016/1/265_brown.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    2. Mian, Shehzad L., 1996. "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 419-439, September.
    3. Goswami, Gautam & Shrikhande, Milind M., 2001. "Economic exposure and debt financing choice," Journal of Multinational Financial Management, Elsevier, vol. 11(1), pages 39-58, February.
    4. Durbin, Erik & Ng, David, 2005. "The sovereign ceiling and emerging market corporate bond spreads," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 631-649, June.
    5. Brown, Martin & Jappelli, Tullio & Pagano, Marco, 2009. "Information sharing and credit: Firm-level evidence from transition countries," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 151-172, April.
    6. Kevin Cowan & Erwin Hansen & Luis Oscar Herrera, 2005. "Currency Mismatches, Balance-Sheet Effects and Hedging in Chilean Non-Financial Corporations," Research Department Publications 4387, Inter-American Development Bank, Research Department.
    7. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
    8. Fenghua Song & Anjan V. Thakor, 2007. "Relationship Banking, Fragility, and the Asset-Liability Matching Problem," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2129-2177, November.
    9. Mr. Christoph B. Rosenberg & Marcel Tirpák, 2008. "Determinants of Foreign Currency Borrowing in the New Member States of the EU," IMF Working Papers 2008/173, International Monetary Fund.
    10. Carlson, John A. & Valev, Naven, 2008. "Fixed exchange rate credibility with heterogeneous expectations," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1712-1722, December.
    11. Simi Kedia & Abon Mozumdar, 2003. "Foreign Currency Denominated Debt: An Empirical Examination," The Journal of Business, University of Chicago Press, vol. 76(4), pages 521-546, October.
    12. Ongena, Steven & Brown, Martin & Yeşin, Pınar, 2009. "Foreign Currency Borrowing by Small Firms," CEPR Discussion Papers 7540, C.E.P.R. Discussion Papers.
    13. Gaston Gelos, R., 2003. "Foreign currency debt in emerging markets: firm-level evidence from Mexico," Economics Letters, Elsevier, vol. 78(3), pages 323-327, March.
    14. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    15. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    16. Calvo-Gonzalez, Oscar & Basso, Henrique S. & Jurgilas, Marius, 2007. "Financial dollarization: the role of banks and interest rates," Working Paper Series 748, European Central Bank.
    17. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    18. Martinez, Lorenza & Werner, Alejandro, 2002. "The exchange rate regime and the currency composition of corporate debt: the Mexican experience," Journal of Development Economics, Elsevier, vol. 69(2), pages 315-334, December.
    19. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
    20. Benavente, Jose Miguel & Johnson, Christian A. & Morande, Felipe G., 2003. "Debt composition and balance sheet effects of exchange rate depreciations: a firm-level analysis for Chile," Emerging Markets Review, Elsevier, vol. 4(4), pages 397-416, December.
    21. Matti Keloharju & Mervi Niskanen, 2001. "Why Do Firms Raise Foreign Currency Denominated Debt? Evidence from Finland," European Financial Management, European Financial Management Association, vol. 7(4), pages 481-496, December.
    22. George Allayannis & Gregory W. Brown & Leora F. Klapper, 2003. "Capital Structure and Financial Risk: Evidence from Foreign Debt Use in East Asia," Journal of Finance, American Finance Association, vol. 58(6), pages 2667-2710, December.
    23. Enrica Detragiache & Thierry Tressel & Poonam Gupta, 2008. "Foreign Banks in Poor Countries: Theory and Evidence," Journal of Finance, American Finance Association, vol. 63(5), pages 2123-2160, October.
    24. Arteta Carlos O., 2005. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Currency Mismatches in Bank Intermediation?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-30, May.
    25. Beer, Christian & Ongena, Steven & Peter, Marcel, 2010. "Borrowing in foreign currency: Austrian households as carry traders," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2198-2211, September.
    26. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1697-1727, July.
    27. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 858-869, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Brown & Karolin Kirschenmann & Steven Ongena, 2014. "Bank Funding, Securitization, and Loan Terms: Evidence from Foreign Currency Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1501-1534, October.
    2. Ongena, Steven & Brown, Martin & Yeşin, Pınar, 2009. "Foreign Currency Borrowing by Small Firms," CEPR Discussion Papers 7540, C.E.P.R. Discussion Papers.
    3. Brown, Martin & Ongena, Steven & Yesin, Pinar, 2011. "Foreign currency borrowing by small firms in the transition economies," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 285-302, July.
    4. Martin Brown & Steven Ongena & Pinar Yeşin, 2014. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(1), pages 110-131, March.
    5. Brown, M. & Ongena, S. & Yesin, P., 2008. "Currency Denomination of Bank Loans : Evidence from Small Firms in Transition Countries," Other publications TiSEM c01ada6e-5c4b-48eb-8743-6, Tilburg University, School of Economics and Management.
    6. Brown, M. & de Haas, R., 2010. "Foreign Currency Lending in Emerging Europe : Bank Level Evidence," Other publications TiSEM 29059e97-755d-4c51-b372-e, Tilburg University, School of Economics and Management.
    7. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.
    8. Harasztosi, Péter & Kátay, Gábor, 2020. "Currency matching by non-financial corporations," Journal of Banking & Finance, Elsevier, vol. 113(C).
    9. Martin Brown & Ralph De Haas, 2012. "Foreign banks and foreign currency lending in emerging Europe [Capital structure and financial risk: evidence from foreign debt use in East Asia]," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 57-98.
    10. Kátay, Gábor & Péter, Harasztosi, 2017. "Currency Matching and Carry Trade by Non-Financial Corporations," Working Papers 2017-02, Joint Research Centre, European Commission.
    11. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2022. "Foreign currency loans and credit risk: Evidence from U.S. banks," Journal of International Economics, Elsevier, vol. 135(C).
    12. Roberto Alvarez & Erwin Hansen, 2017. "Corporate Currency Risk and Hedging in Chile: Real and Financial Effects," IDB Publications (Working Papers) 97976, Inter-American Development Bank.
    13. Sung C. Bae & Hyeon Sook Kim & Taek Ho Kwon, 2020. "Foreign currency borrowing surrounding the global financial crisis: Evidence from Korea," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 786-817, May.
    14. Miguel FUENTES, 2009. "Dollarization Of Debt Contracts: Evidence From Chilean Firms," The Developing Economies, Institute of Developing Economies, vol. 47(4), pages 458-487, December.
    15. Hardy, Bryan, 2023. "Foreign currency borrowing, balance sheet shocks, and real outcomes," Journal of International Money and Finance, Elsevier, vol. 139(C).
    16. Minsuk Kim, 2019. "Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence," IMF Working Papers 2019/168, International Monetary Fund.
    17. 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.
    18. Rossi Jr, José Luiz, 2009. "Corporate financial policies and the exchange rate regime: Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 10(4), pages 279-295, December.
    19. Gábor Pellényi & Péter Bilek, 2009. "Foreign Currency Borrowing: The Case of Hungary," Working Paper / FINESS 5.4, DIW Berlin, German Institute for Economic Research.
    20. repec:onb:oenbwp:y::i:171:b:1 is not listed on IDEAS
    21. Brown, Martin & De Haas, Ralph & Sokolov, Vladimir, 2013. "Regional Inflation and Financial Dollarization," Working Papers on Finance 1327, University of St. Gallen, School of Finance.

    More about this item

    Keywords

    foreign currency debt; banking;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:gdec10:8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/vfselea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.