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Foreign currency loans and systemic risk in Europe

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  • Pinar Yesin

Abstract

Foreign currency loans to the unhedged non-banking sector are remarkably prevalent in Europe and create a significant exchange-rate-induced credit risk to European banking sectors. In particular, Swiss franc (CHF)-denominated loans, popular in Eastern European countries, could trigger simultaneous bank failures if depreciation of the domestic currencies prevents unhedged borrowers from servicing the loans. Foreign currency loans thus pose a systemic risk from a “common market shock” perspective. The author uses a novel dataset of foreign-currency loans from 17 countries for 2007-11 (collected by the Swiss National Bank) and builds on the method suggested by Ranciere, Tornell, and Vamvakidis (2010) to quantify this systemic risk. The author finds that systemic risk is substantial in the non-euro area, while it is relatively low in the euro area. However, CHF-denominated loans are not the underlying source of the high systemic risk: Loans denominated in other foreign currencies (probably to a large extent in euros) contribute significantly more to the systemic risk in the non-euro area than CHF-denominated loans. Furthermore, systemic risk shows high persistence and low volatility during the sample period. The author also finds that banks in Europe have continuously held more foreign-currency denominated assets than liabilities, indicating their awareness of the exchange-rate-induced credit risk they face.

Suggested Citation

  • Pinar Yesin, 2013. "Foreign currency loans and systemic risk in Europe," Review, Federal Reserve Bank of St. Louis, issue May, pages 219-236.
  • Handle: RePEc:fip:fedlrv:y:2013:i:may:p:219-236:n:v.95no.3
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    References listed on IDEAS

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    Cited by:

    1. Andrieș, Alin Marius & Fischer, Andreas M. & Yeșin, Pınar, 2017. "The asymmetric effect of international swap lines on banks in emerging markets," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 215-234.
    2. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2017. "Monetary and macroprudential policy with foreign currency loans," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 352-372.
    3. Krogstrup, Signe & Tille, Cédric, 2018. "Foreign currency bank funding and global factors," Kiel Working Papers 2104, Kiel Institute for the World Economy (IfW).
    4. Joseph Crowley, 2015. "Central and Commercial Bank Balance Sheet Risk Before, During, and After the Global Financial Crisis," IMF Working Papers 15/47, International Monetary Fund.
    5. repec:fau:fauart:v:68:y:2018:i:3:p:202-244 is not listed on IDEAS
    6. Judit Temesvary, 2016. "The drivers of foreign currency-based banking in Central and Eastern Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(2), pages 233-257, April.
    7. Alin Marius Andries & Andreas M. Fischer & Pinar Yesin, 2015. "The impact of international swap lines on stock returns of banks in emerging markets," Working Papers 16.01, Swiss National Bank, Study Center Gerzensee.
    8. Elisabetta Montanaro, 2016. "The process towards centralisation of the European financial supervisory architecture: The case of the Banking Union," PSL Quarterly Review, Economia civile, vol. 69(277), pages 135-172.
    9. Liliana Varela & Juliana Salomao, 2016. "Exchange Rate Exposure and Firm Dynamics," Working Papers 2016-278-05, Department of Economics, University of Houston.
    10. Ludmila Fadejeva & Martin Feldkircher & Thomas Reininger, 2014. "International Transmission of Credit Shocks: Evidence from Global Vector Autoregression Model," Working Papers 2014/05, Latvijas Banka.
    11. repec:prg:jnlpep:v:preprint:id:530:p:1-15 is not listed on IDEAS
    12. repec:eee:phsmap:v:506:y:2018:i:c:p:433-450 is not listed on IDEAS
    13. Krogstrup, Signe & Tille, Cédric, 2015. "On the roles of different foreign currencies in European bank lending," CEPR Discussion Papers 10845, C.E.P.R. Discussion Papers.
    14. Krzysztof Czerkas, 2016. "The foreign currency mortgage loans in the Polish banking sector and its possible macroeconomic and political consequences," Lodz Economics Working Papers 8/2016, University of Lodz, Faculty of Economics and Sociology.
    15. repec:cnb:ocpubv:as17 is not listed on IDEAS
    16. Małgorzata Skibińska, 2018. "Transmission of monetary policy and exchange rate shocks under foreign currency lending," Post-Communist Economies, Taylor & Francis Journals, vol. 30(4), pages 506-525, July.
    17. Shahzad, Syed Jawad Hussain & Hernandez, Jose Areola & Hanif, Waqas & Kayani, Ghulam Mujtaba, 2018. "Intraday return inefficiency and long memory in the volatilities of forex markets and the role of trading volume," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 506(C), pages 433-450.
    18. Gábor Dávid Kiss & Tamás Schuszter, 2015. "The Euro Crisis and Contagion among Central and Eastern European Currencies: Recommendations for Avoiding Lending in a Safe Haven Currency such as CHF," Prague Economic Papers, University of Economics, Prague, vol. 2015(6), pages 678-698.
    19. repec:eee:jbfina:v:83:y:2017:i:c:p:153-172 is not listed on IDEAS
    20. Pritsker, Matthew, 2017. "Choosing Stress Scenarios for Systemic Risk Through Dimension Reduction," Risk and Policy Analysis Unit Working Paper RPA 17-4, Federal Reserve Bank of Boston.

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