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When Risk Shifts, not Shrinks: Bank Portfolio Responses to FX Macroprudential Regulation

Author

Listed:
  • Viktoria Alaverdyan

    (Central Bank of Armenia)

  • Gevorg Minasyan

    (Central Bank of Armenia)

  • Aleksandr Shirkhanyan

    (Central Bank of Armenia)

Abstract

This paper examines whether macroprudential foreign exchange (FX) regulations unintentionally shift currency risk to sectors not directly targeted by such measures. Using a difference-indifferences framework and a highly granular dataset combining loan-level credit registry data with bank-level balance sheet information, we analyse how Armenian banks adjusted their portfolios following the introduction of a differentiated loan-to-value (LTV) regulation that imposed stricter limits on FX-denominated mortgages. The results show that the differentiated LTV, while tightening borrowing conditions for FX-denominated mortgages, also led to an increase in the dollarization of business loans and a higher share of foreign-currency bonds in banks' portfolios. These shifts imply that FX-related macroprudential policies can reallocate rather than reduce currency risk, emphasizing the need for system-wide oversight to prevent its build-up in unregulated segments of the financial system.

Suggested Citation

  • Viktoria Alaverdyan & Gevorg Minasyan & Aleksandr Shirkhanyan, 2025. "When Risk Shifts, not Shrinks: Bank Portfolio Responses to FX Macroprudential Regulation," Working Papers WP-2025-04, Central Bank of Armenia.
    • Handle: RePEc:ara:wpaper:wp-2025-04
    as

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    References listed on IDEAS

    as
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    3. repec:imf:imfdep:2023/002 is not listed on IDEAS
    4. Bergman, U. Michael & Sørensen, Peter Birch, 2021. "The interaction of actual and fundamental house prices: A general model with an application to Sweden," Journal of Housing Economics, Elsevier, vol. 54(C).
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    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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