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Foreign currency borrowing of households in new EU member states

Author

Listed:
  • Attila Csajbók

    (Magyar Nemzeti Bank)

  • András Hudecz

    (Magyar Nemzeti Bank)

  • Bálint Tamási

    (Magyar Nemzeti Bank)

Abstract

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.

Suggested Citation

  • Attila Csajbók & András Hudecz & Bálint Tamási, 2010. "Foreign currency borrowing of households in new EU member states," MNB Occasional Papers 2010/87, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:opaper:2010/87
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    References listed on IDEAS

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    Cited by:

    1. Elisabeth Beckmann & Sandra Dvorsky & Thomas Scheiber, 2011. "OeNB Euro Survey: Growing Uncertainty, but Overall Euroization Not Affected," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 88-99.
    2. Mariya Hake & Fernando Lopez-Vicente & Luis Molina, 2014. "Do the Drivers of Loan Dollarization Differ between CESEE and Latin America? A Meta-Analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-35.
    3. Jesús Crespo Cuaresma & Jarko Fidrmuc & Mariya Hake, 2011. "Determinants of Foreign Currency Loans in CESEE Countries: A Meta-Analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 69-87.
    4. repec:cbh:journl:v:14:y:2015:i:3:p:60-87 is not listed on IDEAS
    5. Judit Temesvary, 2016. "The drivers of foreign currency-based banking in Central and Eastern Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(2), pages 233-257, April.
    6. Małgorzata Skibińska, 2018. "Transmission of monetary policy and exchange rate shocks under foreign currency lending," Post-Communist Economies, Taylor & Francis Journals, vol. 30(4), pages 506-525, July.
    7. Judit Temesváry, 2014. "Explaining the Differences between Local Currency versus FX-denominated Loans and Deposits in the Central-Eastern European Economies," CERS-IE WORKING PAPERS 1405, Institute of Economics, Centre for Economic and Regional Studies.
    8. Banai, Adam & Kiraly, Julia & Nagy, Marton, 2011. "Home high above and home deep down below -- lending in Hungary," Policy Research Working Paper Series 5836, The World Bank.
    9. Pál Péter Kolozsi & Ádám Banai & Balázs Vonnák, 2015. "Phasing out household foreign currency loans: schedule and framework," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 14(3), pages 60-87.
    10. Egert Juuse & Rainer Kattel, 2014. "Financialisation and the Financial and Economic Crises: The Case of Estonia," FESSUD studies fstudy20, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    11. repec:onb:oenbwp:y:2011:i:1:b:1 is not listed on IDEAS
    12. Beer, Christian & Ongena, Steven & Peter, Marcel, 2010. "Borrowing in foreign currency: Austrian households as carry traders," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2198-2211, September.
    13. Mile Bošnjak, 2018. "Swiss Franc from the Croatian Perspective," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 7(3), pages 41-56.
    14. Aiba, Daiju & Odajima, Ken & Khou, Vouthy, 2017. "Foreign Currency Borrowing and Risk-Hedging Behavior: Evidence from a Household Survey in Cambodia," Working Papers 143, JICA Research Institute.
    15. Dóra Siklós, 2016. "Capital Adequacy Regulations in Hungary: Did It Really Matter?," Working Papers 11, European Stability Mechanism.
    16. Szabolcs Szikszai & Tamás Badics & Csilla Raffai & Zsolt Stenger & András Tóthmihály, 2013. "Studies in Financial Systems No 8 Hungary," FESSUD studies fstudy08, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    17. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.
    18. Shijaku, Gerti, 2016. "Foreign currency lending in Albania," MPRA Paper 79087, University Library of Munich, Germany.
    19. Hegedüs, József & Somogyi, Eszter & Augustyniak, Hanna & Csizmady, Adrienne & Laszek, Jacek & Olszewski, Krzysztof, 2019. "Posztszocialista lakásrendszerek Magyarországon és Lengyelországban [Post-socialist housing systems in Hungary and Poland]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 980-1004.
    20. Aron Gereben & Ferenc Karvalits & Zalan Kocsis, 2011. "Monetary policy challenges during the crisis in a small open dollarised economy: the case of Hungary," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 179-188, Bank for International Settlements.
    21. Julia Kiraly & Atila Csajbok & Mihaly Andras Kovacs, 2011. "A Policy Recipe for Successful Convergence of CESEE Countries in the Post-crisis World," Chapters, in: Ewald Nowotny & Peter Mooslechner & Doris Ritzberger-Grünwald (ed.), Post-Crisis Growth and Integration in Europe, chapter 12, Edward Elgar Publishing.
    22. András Bethlendi, 2015. "Bad product development results in systemic market failure – Foreign currency mortgage loans to Hungarian households," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 14(1), pages 5-30.
    23. Júlia Király, 2020. "Hungary and Other Emerging EU Countries in the Financial Storm," Financial and Monetary Policy Studies, Springer, number 978-3-030-49544-2, December.
    24. Elisabeth Beckmann, 2017. "How does foreign currency debt relief affect households’ loan demand? Evidence from the OeNB Euro Survey in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-32.
    25. repec:cbh:journl:v:14:y:2015:i:1:p:5-30 is not listed on IDEAS

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    More about this item

    Keywords

    foreign currency lending; new member states; credit risk; monetary policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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