Foreign Currency Lending Research Articles

THE TRANSFORMATION OF RETAIL CREDIT FINANCING IN THE WAKE OF THE CRISES IN HUNGARY

The money abundance that preceded the 2008 crisis brought about a number of distortions in the value judgements of economic actors and their attitudes towards money. Unlimited liquidity generated a huge supply of credit, which all economic players exploited beyond their means. The crisis-induced downturn caused huge problems in the repayment of loans. Tens of thousands of families and businesses have faced problems in surviving, caused by increased credit burdens. As a consequence, attitudes towards credit changed significantly after the crisis. For the Hungarian households too, excessive borrowing before the crisis caused huge problems. In Hungary, the problem was not only with the volume of credit, but also with its denomination. The proliferation of foreign currency lending and the exchange rate risk that it entailed was a huge challenge for tens of thousands of families, which they could only overcome with state support. The aim of this study is to examine the borrowing of households in Hungary over a number of years, looking in particular at its composition and the types of credit. In this study, the analysis was based on the household stock data of the Hungarian National Bank. The aim of the work is to show the trends and changes in Hungarian household borrowing in the wake of the crises. The analysis reveals the effects of the crises, which can be reduced by increasing financial awareness. The study provides a good basis for strengthening the financial culture of Hungarian households, which areas limit future irresponsible borrowing and provide a good shield against crises in the financial field.

An Overview Analysis of Debt Financing for Hungarian Enterprises and the Impact of Economic Crises

There are two main ways of financing businesses, equity and debt. Debt financing, including debt financing, is vital for many economic operators and is thus a key to their survival. Businesses can obtain the funds they need quickly and easily from the financial markets, mainly in the form of credit products. However, excessive indebtedness carries a number of risks in the short, medium and long term. For all economic entities, it is crucial to determine their optimal level of indebtedness and their level of credit. The debt financing of companies and businesses is heavily influenced by macroeconomic developments. In all cases, the changes brought about by the crisis, global economic anomalies, rising interest rates and inflation have a negative impact on the exposure of businesses to credit providers. This is particularly true for Hungarian businesses. The prevalence of foreign currency lending before the 2008 downturn and the difficulties that followed the crisis have led many small and medium-sized enterprises and large companies to bankruptcy or to the brink of closure. This crisis has been a very big learning lesson for all economic actors, including the corporate and entrepreneurial sector. Despite the fact that lending standards and conditions have tightened considerably in recent years, there are still many risks associated with debt financing, especially when it is used for operations rather than investment. The aim of this paper is to illustrate the changes in corporate lending from the 2008 crisis and the coronavirus crisis to the present day, using the example of the Hungarian business sector. The study will also shed light on the changes in lending and the change in the attitudes of firms, which will provide a measure of the level of corporate financial culture and its manifestation in financial decisions.

Favoring the small and the plenty: Islamic banking for MSMEs

While MSMEs form the backbone of many countries, most of them suffer from limited access to finance. We extend the literature by examining whether Islamic banks, compared to their conventional peers, favor more the MSMEs credit market segment in Turkey. We do this by considering various aspects of the lending behavior towards MSMEs (total lending, foreign currency lending, loan commitments, loan quality, and revenues) across different MSMEs size categories (micro, small and medium-sized firms). Our results show that once we control for bank-specific characteristics, we find that Islamic banks are more engaged with MSME financing and generate more revenues from servicing MSMEs. Concerning the quality of the MSME lending portfolio, no distinguishable patterns were observed between Islamic and conventional banks.

FEATURES OF RECEIVING, ACCOUNTING AND AUDIT OF LOANS IN FOREIGN CURRENCY AT THE ENTERPRISE

The article is devoted to the features of receiving, accounting and auditing of a loan in foreign currency at the enterprise. The topicality of the topic is explained by the fact that ensuring the sustainable development of enterprises requires adequate financing at the expense of various components of equity capital, borrowed capital and loan capital, including lending in foreign currency. the share of balances for loans granted in foreign currency was 29% of the loan portfolio of commercial banks in 2021. This indicates the presence of lending in foreign currency and the need for research and scientific substantiation of the mechanism for obtaining, clearing and auditing loans in foreign currency. The object of the study is crediting, accounting and auditing in foreign currency at the enterprise. The purpose of the study is to substantiate the peculiarities of obtaining, accounting and auditing foreign currency loans at the enterprise to ensure complete and reliable information about the financial obligations of the enterprise. The methods of the study are analysis and synthesis, system analysis, statistical analysis to study the dynamics and structure of loans granted to enterprises by commercial banks in foreign currency, the dynamics of average annual interest rates on loans granted to enterprises. Conditional periods based on indicators of balances of funds for loans granted in foreign currency and the share of loans in foreign currency in the credit portfolio of commercial banks are determined. The first conditional period of development of lending in foreign currency lasted until 2008. It is characterized by a high and constantly growing demand for loans in foreign currency; the share of balances on loans granted in foreign currency was 59% in 2008, a decrease in the exchange rate and low interest rates for using loans in foreign currency against the national currency. The second conditional period of development of foreign currency lending began during the financial crisis of 2008. It is characterized by a 5 times decrease in the balances of loans granted in foreign currency due to the introduced institutional restrictions. Features of lending in foreign currency are determined. The sequence of audit stages of crediting in foreign currency at the enterprise has been developed. Conclusions – despite the institutional restrictions on lending in foreign currency introduced after the financial crisis of 2008, business entities form demand for loans in foreign currency from residents and non-residents. Accounting for loans in foreign currency has certain features and complexity compared to accounting for loans in national currency. Correspondence of accounting accounts for loans received in foreign currency according to typical operations: receiving a loan in foreign currency, accrual and payment of interest for using the loan, repayment or extension of the loan in foreign currency, revaluation of the loan in foreign currency and display of exchange rate differences.

Banking and Eurodollars in Italy in the 1950s

This article challenges current interpretations of the rise of the Eurodollar market. It argues that rather than being the exclusive innovation of British banks, the Eurodollar market had also Italian origins. Foreign-currency lending in Italy in the 1950s was characterized by competitive behavior. I explain the accumulation of Eurodollar deposits by Italian banks as resulting from the fact that nonresident foreign-currency deposits were not subject to reserve requirements. Furthermore, I discuss the attitudes of the Bank of Italy regarding the financing of foreign-currency credits with nonresident dollar deposits (Eurodollars) and compare the Eurocurrency liabilities of Italian banks vis-à-vis those of the City of London. The comparison facilitates an approximate estimation of the size of the Eurocurrency market in the late 1950s and, even more importantly, a recalibration of the view that the City of London was the dominant Eurodollar player from the outset.

Housing Finance in the Aftermath of the Foreign-Currency Mortgage Crisis in Eastern Europe: Editorial

This special issue expands on the existing research on foreign-currency lending and the forex loan crisis in Eastern Europe by investigating other forms of housing-related finance and post-crisis developments. Bringing together hitherto disparate strands of research, our issue traces the linkages between macroeconomic developments, state measures, class dynamics, and social movements in the aftermath of the forex loan crises in Latvia, Romania, Croatia, Bosnia and Herzegovina, and Hungary as part of their long-term trajectories of housing finance. We find that despite different political-institutional articulations, these trajectories all feature a new expansion of lending based on a bifurcation of the credit market into more secure, often subsidised mortgage lending aimed at better-off debtors and more risky non-mortgage loans used for housing purposes by more precarious households.

Does the Past Haunt Us No More? How Proximity to Foreign Currency Lending Experience Affects Trust in the Banking System and Financial Literacy

While FX lending is often the focus of analyses on non-performing loans and postcrisis debt relief measures, its effect on debtors’ subsequent behaviour and attitudes has been addressed to a far lesser extent in the research in recent years. In our study, we seek to fill this gap by examining the effect of proximity to foreign currency lending experience on an individual’s trust in the banking system, and financial literacy. For our study, we relied on data from a CATI survey conducted on behalf of the MNB, the central bank of Hungary, in September 2021. The sample of 1,001 respondents represents the Hungarian adult population in terms of gender, age, type of municipality, region and educational level. In addition to the proximity to foreign currency lending experience, modelling controls included sociodemographic variables on the one hand, and variables related to borrowing on the other. The effect of proximity to foreign currency lending experience was examined in terms of both trust in the banking system and components of financial literacy. The effect was quantified using a linear regression model based on OLS estimation. According to our estimate, the role of proximity to foreign currency lending experience is less important than expected. Closer proximity to foreign currency lending experience has no apparent effect on a borrower’s overall trust in banks operating in Hungary. At the same time, proximity to foreign currency lending experience increases the likelihood of the respondent’s belief that a bank acts in bad faith (exploiting legal loopholes). Among the components of financial literacy, it plays a significant role only in financial knowledge, i.e. controlled for other factors, closer proximity on average increases financial knowledge. Conversely, it fails to influence, in any manner, the adoption of more conscious attitude, behaviour and practices.

LTV ЯК МАКРОПРУДЕНЦІЙНИЙ ІНСТРУМЕНТ ГАЛЬМУВАННЯ БУМІВ У КРЕДИТУВАННІ ДОМОГОМПОДАРСТВ

The article discusses using the loan-to-value ratio (LTV) in household lending in Poland and Romania to prevent or slow down credit booms, taking into account the feasibility of its implementation in Ukraine. The statistical analysis was carried out on Poland, Romania, and Ukraine from 2007 to 2021: it covers the periods of the global financial crisis, period of stabilization, and the banking crisis in Ukraine. The goals and instruments of macroprudential policy have been systematized with an emphasis on the possibility of deceleration of credit booms: countercyclical capital buffer; restrictions on the ratios: loan-to-value, debt-service-to-income (DSTI), debt-to-income (DTI), loan-to-borrower income (LTI), loan-to-deposit (LTD), unsecured loans to total loans, volumes of lending in foreign currency, lending growth. Specific instruments related to lending are characterized: LTV, DTI/DSTI, foreign currency lending restriction (introduced in Ukraine after the global financial crisis), and limiting restrictions on credit or credit growth. The peculiarities of applying the LTV as an instrument of macroprudential policy in Romania, Poland, and Ukraine are disclosed. It is shown that the loan-to-value ratio should be used primarily to slow down booms in mortgage lending. At the same time, the practice of Romania has shown that the growth of other types of consumer loans can be limited by the LTV as well. The LTV limits should be reviewed depending on the situation in the consumer lending market. An analysis was made of the ratio of household debt to nominal GDP and the percentage of non-performing loans to the total amount of loans in Poland, Romania, and Ukraine during 2007-2021, with a focus on the adoption of the LTV. The analysis showed the credit boom in Poland and Ukraine in households lending before the global financial crises: average quarterly growth rates for 2007 amounted to 8.62% and 8.84%, respectively. These countries didn't use LTV at those time. In contrast, Romania did not experience a credit boom in 2007, and perhaps one of the factors was the application in 2004 of the LTV. The implementation of the loan-to-value ratio can indeed be seen as a factor in slowing down credit booms, but it may not work as a non-performing loans protector.

Partisan Depositor Responses to a Currency Shock

Depositor responses to a large currency shock vary depending on political views. Triggered by a combination of economic policies and a geopolitical conflict with the U.S., the Turkish lira depreciated 14% against the U.S. dollar on August 10, 2018. Using unique depositor-level micro data from a Turkish bank, we find that households significantly increase their share of deposits held in foreign currency after the currency shock, and the shift to FX is most pronounced in areas with low support for president Erdogan, while people in areas with high support are significantly less likely to move from lira to FX. These shifts to FX persist long after the shock, despite the lira regaining much of its lost value. The change in depositor currency preferences is associated with an increase in foreign-currency lending and increasing currency mismatches on Turkish banks' balance sheets, which translate into differences in bank profitability.

Capital inflows and bank stability around the financial crisis: The mitigating role of macro-prudential policies

While capital inflows bring a number of benefits to recipient countries, they may also exacerbate some risks including financial instability. In this paper, we propose that cross-country differences in the financial stability of individual banks can be explained, among other things, by cross-country differences in capital inflows. Using disaggregated inflows for 85 developing countries over the period 2000–2014, we find some empirical evidence supporting our proposition. In particular, we find that before the crisis (2000–2007), bank financial stability improved ifmore capital flows – in the form of lending investments – were directed to developing countries. On the other hand, after the crisis (2010–2014), bank financial stability decreased if more foreign capital – in the form of portfolio and/or lending investments – moved to such countries. These findings emphasize the destructive role financial crises play by preventing developing economies from reaping the financial stability benefits of cross-border flows. Given the recent popularity of macro-prudential policies as tools for promoting financial stability, we next examine whether cross-country activations of prudential instruments effectively alleviate such adverse effects of capital inflows on bank stability. We find that the negative impact of capital inflows is indeed mitigated if countries adopt macro-prudential measures, specifically by imposing limits on foreign currency lending.

Object of legal relations of crediting in foreign currency

In the article presents the systematization of legal and scientific approaches to the composition and characteristics of foreign currency lending entities. It was opened and analyzed the scientific approaches and views of the legislator on this issue in order to distinguish a generalized definition of this aspect. It is established that at the present stage of development of scientific thought and legal support there is no unified approach to the separation of the main composition of objects of legal relations of the specified category. It is revealed that the civil law takes into account the basic values of credit relations (the allocation of objects such as cash and interest on the loan), but in other regulations there is no reference to their exhaustive list, which complicates the definition of characteristics and features of this phenomenon. Based on the research of scientific and legislative approaches, the classification of features and types of legal relations objects in the sphere of foreign currency lending is formulated. The following main features and types of objects of legal relations in the sphere of foreign currency lending are distinguished, namely: 1) a specific feature according to which the foreign currency cash provided by the lender to the borrower under the credit agreement is distinguished; 2) the value attribute, which provides for the allocation of the principal amount of the borrower's obligations and the interest on them specified in the credit agreement; 3) an obligatory sign (a reference to the obligation on the part of the lender to provide a loan of this category, and the obligation on the part of the borrower to pay the loan and interest thereon); 4) a sign of reversal caused by the characteristics of repayment of principal and interest on the loan; 5) an additional feature of foreign currency conversion, which allows to distinguish the object of legal relations in the sphere of lending in the direction of currency transactions, namely, the exchange rate.

International spillovers of monetary policy: Evidence from France and Italy

In this paper we provide empirical evidence on the impact of US and UK monetary policy changes on credit supply of banks operating in Italy and France over the period 2000–2015, exploring the existence of an international bank lending channel. Exploiting bank balance sheet heterogeneity, we find that monetary policy tightening abroad leads to a reduction of credit supply at home, in particular for US monetary policy changes. Our results show that USD funding plays an important role in the transmission mechanism, especially for French banks which rely to a larger extent on USD funding. We also show that banks adjust their euro and foreign currency lending differently, thus implying that funding sources in different currencies are not perfect substitutes. This is especially the case when tensions in currency swap markets are high, thus resulting in costly cross-currency funding.

Transmission of monetary policy and exchange rate shocks under foreign currency lending

This paper analyses the differences in reaction of domestic and foreign currency lending to monetary and exchange rate shocks, using a panel VAR model estimated for the three biggest Central and Eastern European countries (Poland, the Czech Republic and Hungary). Our results point toward a drop in domestic currency loans and an increase of foreign currency credit in reaction to monetary policy tightening in Poland and Hungary, suggesting that the presence of foreign currency debt weakens the transmission of monetary policy. A currency depreciation shock leads to an initial decline in foreign currency lending, but also in loans denominated in domestic currency as central banks react to a weaker exchange rate by increasing the interest rates. However, after several quarters, credit in foreign currency accelerates, indicating that borrowers start using it to substitute for depressed domestic currency lending.

Why do firms default on their foreign currency loans? The case of Hungary

I isolate the effect of the choice of foreign currency on the loan performance of firms borrowing in different currencies in crisis times. I use a novel micro-level dataset from Hungary to decompose the factors contributing to the worse loan performance of foreign currency borrowers compared to local currency debtors. I find that foreign currency denomination can worsen loan performance considerably, while selection also contributes significantly to the default differences. On the one hand, per se less creditworthy firms borrowed in foreign currency and during the crisis the foreign currency shocks further weakened their loan performances. On the other hand, more creditworthy firms that were also well-prepared for the currency risks also borrowed in foreign currency. My results suggest that not the institution of foreign currency lending per se that should be blamed for the bad loan performance of foreign currency borrowers, instead one should consider the characteristics of the borrowers.

Systemic Risk and Foreign Currency Positions of Banks: Evidence from Emerging Europe

This article investigates the impact of foreign currency (FX) denominated assets and liabilities on systemic risk by using a unique hand-collected dataset of bank-level FX positions for the period 2005–2012. The sample consists of banks from Central and Eastern Europe with large share of FX exposures on the balance sheet. Empirical findings indicate that systemic risk is dependent on the currency choice of financial institutions. While FX positions denominating in EUR and USD do not pose systemic risk concerns, FX positions denominating in exotic currencies like CHF significantly enhance the banks’ systemic importance. The negative influence of CHF positions might be reduced through prudent corporate governance mechanisms, tight restrictions on banking activity, and more restrictive limits on foreign currency lending in the home countries of the bank holding companies.

Foreign Currency Lending

Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads by approximately 20 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately USD 2.55 million for loans of average size and duration. We show that our finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets. Borrowers can lower the extra cost by forming strong lending relationships with their banks.

International Spillovers of Monetary Policy: Evidence from France and Italy

In this paper we provide empirical evidence on the impact of US and UK monetary policy changes on credit supply of banks operating in Italy and France over the period 2000-2015, exploring the existence of an international bank lending channel. Exploiting bank balance sheet heterogeneity, we find that monetary policy tightening abroad leads to a reduction of credit supply at home, in particular for US monetary policy changes. Our results show that USD funding plays an important role in the transmission mechanism, especially for French banks which rely to a larger extent on USD funding. We also show that banks adjust their euro and foreign currency lending differently, thus implying that funding sources in different currencies are not perfect substitutes. This is especially the case when tensions in currency swap markets are high, thus resulting in costly cross-currency funding.

The Macro-Prudential Measures Taken in Turkey Following the 2008-2009 Global Financial Crisis

The objective of this study is to examine the macro-prudential measures that were taken in Turkey between 2010 and 2015 within a holistic, and, an organized framework, to demonstrate the extent to which the prudential policy tools were used, and, to explain which Basel III standards were adopted in Turkey. In this sense, to our knowledge, this is the first and the most comprehensive study that deals with the macro-prudential measures in Turkey during the period 2010-2015. We reviewed all relevant legislation and reports regarding financial stability and macro-prudential measures. Then, we fit all macro-prudential policy tools into a framework which consists of loan-related measures, liquidity-related measures, and, capital-related measures. Furthermore, we incorporated Basel III standards with our framework in order to expand the scope of our analysis. Within the period under consideration, Turkey utilized all of the tools, except the limit on foreign currency lending, the limit on net open foreign currency position, the limit on currency mismatches. The authorities put 93 regulations into practice in total. 2013, 2011 and 2015 were the years in which the regulations were issued most extensively.

Foreign Banks operating in India with specific business practices models and their Scenario Post RBI Road Map 2005

-During the last two decades, India has seen an unprecedented degree of globalization especially in financial services. At present the cross border financial flows have increased dramatically. Many foreign banks from both developed and developing countries have ventured abroad and established their presence in other countries with specific business practices models. Foreign trade, financial system, technological advances, deregulation impact, industry and its major players’ growth were identified as industry shaping milestones that gradually formed the present business practices models of foreign banks. As of March 2013, there are 43 foreign banks from 26 countries operating as branches and 43 foreign banks from 22 countries operating as representative offices in India. In addition, a number of foreign banks have also entered India via the Non-Banking Financial Company (NBFC) route, while a considerable number have set up captive centers in the country. Foreign banks present in India as representative offices often have correspondent banking relationships with domestic banks and provide a useful platform for foreign banks to access opportunities for foreign currency lending to Indian corporate and financial institutions with the application of specific business practices models. Foreign banks have less than 1% of the total branch network but about 7% of the total financial sector assets and a sizeable 11% of profits. With 334 branches in all, the share of FFIs branches is less than 1%.

Behavioural Finance and Consumer Loan Contracts

Due to the situation that has emerged in the wake of retail lending, particularly foreign currency lending, every circumstance that leads to excessive systemic risks must be taken into consideration, namely the absence of consumer self-control, under- and overreactions and the risks stemming from intertemporal retail consumer decisions. The authors attempt to make consumer decisions understandable by analysing biased intertemporal models. Based on the relevant literature, the authors use a behavioural science approach to shed light using on the underlying factors of action or passivity, the factors that introduce bias into consumer rationality and their potential management, in particular asset regulation and the fair bank acts, deeper and more comprehensive regulation of legal relationships, keeping in mind not only the key interest of consumer protection, but also the predictable and sustainable long-term functioning of financial institutions.