Template-Type: ReDIF-Paper 1.0

Author-Name: Palma Filep-Mosberger
Author-X-Name-First: Palma
Author-X-Name-Last: Filep-Mosberger
Author-Email: mosbergerp@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (Central Bank of Hungary)

Author-Name: Lorant Kaszab
Author-X-Name-First: Lorant
Author-X-Name-Last: Kaszab
Author-Email: kaszabl@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (Central Bank of Hungary)

Author-Name: Zhou Ren
Author-X-Name-First: Zhou
Author-X-Name-Last: Ren
Author-Email: zhou.ren@wu.ac.at
Author-Workplace-Name: Vienna Graduate School of Finance


Title: Spillover Effects of Foreign Currency Loans: the Role of the Bank Lending Channel
Abstract: Local currency borrowers are statistically significantly affected by exchange rate fluctuations due to the bank lending channel.
Using microdata on borrowers from Hungary, this study examines the spillover effects of foreign currency loans on local
currency borrowers following an unexpected appreciation of the Swiss franc (CHF) in January 2015. CHF corporate loans are
considered unhedged since the majority of the borrowers did not have income in CHF. Our analysis indicates that banks holding
a larger portion of unhedged CHF corporate loans reduced their lending in local currency corporate loans after the shock. This
relationship is robust across both extensive (loans terminated by a given bank and no new loans at a bank or banks different
from the account holder bank or banks) and intensive (no new loans at its current bank or banks) margins. Further investigation
into the mechanisms reveals that banks with more unhedged CHF corporate loans experience an increase in non‐performing
CHF loans post‐shock, reducing their capital adequacy. Furthermore, the evidence in our paper suggests that reductions in
banks’ local currency lending due to exchange rate shocks adversely affect the investment activity of small firms and increase
their likelihood of default.
Length: 48 pages
Creation-Date: 2024
File-URL: https://www.mnb.hu/letoltes/mnb-wp-2024-2-final-1.pdf
File-Format: Application/pdf
Number: 2024/2
Classification-JEL: G15, G21, G28, G32, G33.
Keywords: bank lending, exchange rate shock, currency mismatch, FX loans, credit.
Handle: RePEc:mnb:wpaper:2024/2