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Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks

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  • Niepmann, Friederike
  • Schmidt-Eisenlohr, Tim

Abstract

When firms borrow in foreign currency, exchange rate changes can affect their ability to repay the debt. Loan-level data from U.S. banks' regulatory filings show that a 10 percent depreciation of the local currency quarter-to-quarter increases the probability that a firm becomes past due on its loans by 37 basis points for firms with foreign currency debt relative to those with local currency debt. Because firms do not perfectly hedge, exchange rate risk of the borrowers translates into credit risk for banks. Firms are more likely to borrow in foreign currency if they have foreign income and if a UIP deviation makes foreign currency loans cheaper. The paper establishes additional facts on large U.S. banks' international corporate loan portfolios, offering a more comprehensive perspective than syndicated loan data.

Suggested Citation

  • Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2019. "Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks," CEPR Discussion Papers 14212, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14212
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    Cited by:

    1. Ozge Akinci & Albert Queraltó, 2018. "Exchange rate dynamics and monetary spillovers with imperfect financial markets," Staff Reports 849, Federal Reserve Bank of New York.
    2. Georgiadis, Georgios & Zhu, Feng, 2021. "Foreign-currency exposures and the financial channel of exchange rates: Eroding monetary policy autonomy in small open economies?," Journal of International Money and Finance, Elsevier, vol. 110(C).
    3. Friederike Niepmann & Tim Schmidt‐Eisenlohr & Emily Liu, 2021. "The effect of US stress tests on monetary policy spillovers to emerging markets," Review of International Economics, Wiley Blackwell, vol. 29(1), pages 165-194, February.
    4. Stefan Avdjiev & Valentina Bruno & Catherine Koch & Hyun Song Shin, 2019. "The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 151-173, March.
    5. Bryan Hardy, 2018. "Foreign currency borrowing, balance sheet shocks and real outcomes," BIS Working Papers 758, Bank for International Settlements.
    6. Gita Gopinath & Jeremy C. Stein, 2018. "Banking, Trade, and the making of a Dominant Currency," NBER Working Papers 24485, National Bureau of Economic Research, Inc.
    7. Colin Weiss, 2020. "Contractionary Devaluation Risk: Evidence from the Free Silver Movement, 1878-1900," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 705-720, October.
    8. Eren, Egemen & Malamud, Semyon, 2018. "Dominant Currency Debt," CEPR Discussion Papers 13391, C.E.P.R. Discussion Papers.
    9. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2018. "Global Investors, the Dollar, and U.S. Credit Conditions," CEPR Discussion Papers 13237, C.E.P.R. Discussion Papers.
    10. Delis, Manthos & Politsidis, Panagiotis & Sarno, Lucio, 2018. "Foreign currency lending," MPRA Paper 88197, University Library of Munich, Germany.
    11. Isabel Argimón, 2018. "The relevance of currency-denomination for the cross-border effects of monetary policy," Working Papers 1827, Banco de España;Working Papers Homepage.
    12. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2019. "Institutional Investors, the Dollar, and U.S. Credit Conditions," International Finance Discussion Papers 1246, Board of Governors of the Federal Reserve System (U.S.).
    13. José Antonio Ocampo & Germán D. Orbegozo & Mauricio Villamizar-Villegas, 2020. "Post-graduation from the original sin problem The effects of market participation on sovereign debt markets," Borradores de Economia 1113, Banco de la Republica de Colombia.
    14. Alfaro, Laura & Asis, Gonzalo & Chari, Anusha & Panizza, Ugo, 2019. "Corporate debt, firm size and financial fragility in emerging markets," Journal of International Economics, Elsevier, vol. 118(C), pages 1-19.
    15. Sebnem Kalemli-Ozcan & Xiaoxi Liu & Ilhyock Shim, 2018. "Exchange rate appreciations and corporate risk taking," BIS Working Papers 710, Bank for International Settlements.
    16. Camila Casas & Sergii Meleshchuk & Yannick Timmer, 2020. "The Dominant Currency Financing Channel of External Adjustment," Borradores de Economia 1111, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    corporate loans; credit risk; cross-border banking; Exchange Rates;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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