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A New Index of Currency Mismatch and Systemic Risk

Author

Listed:
  • Rancière, Romain
  • Tornell, Aaron
  • Vamvakidis, Athanasios

Abstract

This paper constructs a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers. This measure explicitly takes into account the indirect exchange rate risk that banks undertake when they lend to borrowers that will not be able to repay in the event of a sharp depreciation. Such systemic risk taking is not captured by indicators that are based only on banks’ balance sheet data. The new measure is constructed for 10 emerging European economies and for a broader sample that includes 19 additional emerging economies, for the period 1998-2008. Comparisons with previous currency mismatch measures that do not adjust for unhedged foreign currency borrowing illustrate the advantages of the new approach. In particular, the new measure flagged the indirect currency mismatch vulnerabilities that were building up in a number of emerging economies before the recent global crisis. Measuring currency mismatch more accurately can help country authorities in their efforts to address vulnerabilities at the right time, avoiding hurting growth prospects.

Suggested Citation

  • Rancière, Romain & Tornell, Aaron & Vamvakidis, Athanasios, 2011. "A New Index of Currency Mismatch and Systemic Risk," CEPR Discussion Papers 8250, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8250
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    References listed on IDEAS

    as
    1. Romain Rancière & Aaron Tornell & Frank Westermann, 2008. "Systemic Crises and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 359-406.
    2. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2007. "Currency Mismatches, Debt Intolerance, and the Original Sin: Why They Are Not the Same and Why It Matters," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 121-170 National Bureau of Economic Research, Inc.
    3. Romain Rancière & Aaron Tornall & Athanasio Vamvakidis, 2010. "Currency mismatch, systemic risk and growth in emerging Europe," Post-Print halshs-00754418, HAL.
    4. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373.
    5. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers 763, Board of Governors of the Federal Reserve System (U.S.).
    6. Romain Ranciere & Aaron Tornell & Athanasios Vamvakidis, 2010. "Currency mismatch, systemic risk and growth in emerging Europe," Economic Policy, CEPR;CES;MSH, vol. 25, pages 597-658, October.
    7. Carlos O. Arteta, 2002. "Exchange rate regimes and financial dollarization: does flexibility reduce bank currency mismatches?," International Finance Discussion Papers 738, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Loayza,Norman V. & Ouazad,Amine & Ranciere,Romain, 2017. "Financial development, growth, and crisis: is there a trade-off ?," Policy Research Working Paper Series 8237, The World Bank.
    2. Aylin Aslan & Burcu Tunç, 2017. "Measuring the foreign exchange position for the corporate sector: CBRT's experience," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Statistical implications of the new financial landscape, volume 43 Bank for International Settlements.
    3. Kátay, Gábor & Péter, Harasztosi, 2017. "Currency Matching and Carry Trade by Non-Financial Corporations," Working Papers 2017-02, Joint Research Centre, European Commission (Ispra site).
    4. Nephil Matangi Maskay & Sven Steinkamp & Frank Westermann, 2014. "On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal," CESifo Working Paper Series 5053, CESifo Group Munich.
    5. Josifidis, Kosta & Allegret, Jean-Pierre & Gimet, Céline & Pucar, Emilija Beker, 2014. "Macroeconomic policy responses to financial crises in emerging European economies," Economic Modelling, Elsevier, vol. 36(C), pages 577-591.
    6. Martin Brown & Helmut Stix, 2015. "The euroization of bank deposits in Eastern Europe," Economic Policy, CEPR;CES;MSH, vol. 30(81), pages 95-139.
    7. Livia Chitu, 2013. "Was Unofficial Dollarisation/Euroisation an Amplifier of the ‘Great Recession’ of 2007–2009 in Emerging Economies?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 55(2), pages 233-265, June.
    8. Mirna Dumičić & Vedran Šošić, 2014. "Credit cycles and central bank policy in Croatia: lessons from the 2000s," Chapters,in: Financial Cycles and the Real Economy, chapter 7, pages 96-113 Edward Elgar Publishing.
    9. Tobal Martín, 2017. "Currency Mismatch in the Banking Sector in Latin America and the Caribbean," Working Papers 2017-05, Banco de México.
    10. Martín Tobal, 2014. "Prudential Regulation, Currency Mismatches and Exchange Rate Regimes in Latin America and the Caribbean," Documentos de Investigación - Research Papers 17, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    11. Beckmann, Elisabeth & Stix, Helmut, 2015. "Foreign currency borrowing and knowledge about exchange rate risk," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 1-16.
    12. Svatopluk Kapounek, 2017. "The Impact of Institutional Quality on Bank Lending Activity: Evidence from Bayesian Model Averaging," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 67(5), pages 372-395, October.
    13. Tobal Martín, 2017. "Prudential Regulation, Currency Mismatches and Exchange Rates in Latin America and the Caribbean," Working Papers 2017-21, Banco de México.

    More about this item

    Keywords

    Currency Mismatch; Emerging Economies; Financial Crises; Systemic Risk;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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