Macroprudential FX Regulations: Sacrificing Small Firms for Stability?

Macroprudential FX regulation may reduce systemic risk; however, little is known about its unintended consequences. I propose a theoretical mechanism in which currency mismatch acts as a means for relaxing small firms’ borrowing constraints, and show that policies taxing dollar lending may increase financing disparities between small and large firms. To verify this empirically, I study the implementation of a macroprudential FX tax by the Central Bank of Peru. I construct a novel dataset that combines confidential credit register data with firm-level data on employment, sales, industry and geographic location for the universe of formally registered firms. I show that a 10% increase in bank exposure to the tax significantly increases disparities in the growth of total loans between small and large firms by 1.6 percentage points. When accounting for firms switching to soles financing from different banks, the effect on large firms’ debt is only compositional. Using a confidential dataset on the universe of FX derivative contracts, I show that firms that are mostly affected by the policy are not hedged through FX derivatives. Additional findings using survey data suggest that this policy has potential heterogeneous implications for firms’ real outcomes.