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Foreign currency borrowing of households in new EU member states

  • Attila Csajbók


    (Magyar Nemzeti Bank)

  • András Hudecz


    (Magyar Nemzeti Bank)

  • Bálint Tamási


    (Magyar Nemzeti Bank)

The post-Lehman phase of the financial crisis has exposed a number of weaknesses in the banking sectors of the European Union’s New Member States (NMSs). One of these is the prevalence of lending in foreign currency. While banks themselves in these countries have not taken on sizeable currency risk directly, they passed it on to households and the corporate sector. With large depreciations taking place or looming in the region, the currency risk at households and corporates without a natural hedge is now being transformed into credit risk for the banking sector. This is creating a serious problem in maintaining financial stability and cripples monetary policy in countries where it operates primarily through the exchange rate channel. The patterns of foreign currency lending to households in NMSs vary widely both across countries and time periods. For example, FX lending to households is virtually non-existent in the Czech Republic while in some Baltic countries its share is close to 100 per cent of total household lending. The main goal of the paper is (1) to present the stylised facts of pre-crisis FX lending in NMSs systematically and (2) to try to explain these differing patterns in an econometric model. In order to do so, a panel database of household FX borrowing is compiled, covering 10 NMSs in the period 1999-2008. Our estimation results suggest that the degree of household FX borrowing depends on the interest rate differential, the institutional features of mortgage financing and the monetary regime. Household FX borrowing tends to be less prevalent if the interest rate differential is small, fixed interest rate mortgage financing is available and the monetary authority’s “fear of floating” is low.

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Paper provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its series MNB Occasional Papers with number 2010/87.

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Length: 25 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:mnb:opaper:2010/87
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  1. Christian Beer & Steven Ongena & Marcel Peter, 2008. "Borrowing in Foreign Currency: Austrian Households as Carry Traders," Working Papers 2008-19, Swiss National Bank.
  2. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
  3. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2007. "Financial dollarization: the role of banks and interest rates," Working Paper Series 0748, European Central Bank.
  4. Brzoza-Brzezina, Michał & Chmielewski, Tomasz & Niedźwiedzińska, Joanna, 2007. "Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter?," MPRA Paper 6759, University Library of Munich, Germany.
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