Foreign Currency Loans Research Articles

Foreign currency borrowing and knowledge about exchange rate risk

Foreign currency loans by unhedged borrowers are widespread in many regions of the world. Against this background, we study whether the demand for foreign currency loans is driven by a lack of knowledge about the exchange rate risk emanating from such loans. We employ individual-level survey data from eight Central and Eastern European countries that provides information on agents’ knowledge about exchange rate risk. Results show, first, that a majority of respondents is aware that depreciations increase loan installments. Second, we find that knowledge about the exchange rate risk exerts a strong impact on the choice of the loan currency.

Monetary and Macroprudential Policy with Foreign Currency Loans

In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions where housing loans can be denominated in domestic or foreign currency. We calibrate the model for Poland - a typical small open economy with a large share of foreign currency loans (FCL) - and use it to conduct a series of simulations. They show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a cyclical slowdown.

Foreign Currency Loans in Poland and Hungary – A Comparative Analysis

Abstract Foreign currency loans (FCL) have been commonly used in many developing countries in Europe since 2005-2006. In particular, they were granted to retail clients to finance purchasing of real estate. As interest rates in many Central and Eastern European countries were permanently higher than in Switzerland and the Eurozone, the domestic as well as foreign owned banks had started to sell mortgages in foreign currencies, predominately in Swiss francs and euros. Due to reduced interest such loans turned out to be substantially cheaper and easier to get than loans denominated in domestic currencies. In fact within 2-3 years they gained a substantial and in some cases dominant share in domestic credit markets of CEE. Because repayment of FCL is strictly dependent on the exchange rate of foreign currencies, the considered loans had exposed a large group of domestic borrowers to fx risk which they could not effectively hedge. Such risk became very serious in countries like Poland and Hungary with a clear floating exchange rate regime and substantial share of FCL among bank assets. As far back as 2008, and then in 2011 the fx risk related to such loans strongly materialised due to an unexpected rise of the valuation of the CHF and to a lesser extent the EUR. The goal of this paper is to present the phenomenon of using foreign currency loans in Poland and Hungary for purchasing real estate where such loans concentrate a substantial share of banking assets. The authors will present the nature, conditions and premises of taking such loans and will use a comparative analysis between Poland and Hungary. The paper will also contain an analysis of the influence of such loans on borrowers, banking sectors and systemic risk in both countries. The authors will provide statistical analysis of the exchange rate of PLN and HUF to present the potential of fx risk of FCL. Finally the paper will describe legal and financial supervision solutions applied in both countries to diminish the risks related to the loans.

Romania's Sustainable Development Requirements from the Viewpoint of Regional Economic Bank's Crediting

Abstract This paper is trying to highlight some qualitative and quantitative characteristics of the relationship between regional GDP and loans, both in foreign exchange and lei, for Romania. Taking into consideration the vital importance of funding the national economy by crediting, especially under crisis and after crisis circumstances, we analyzed the influence of regional loans in lei and foreign currency on the size of GDP at county level. The main objective is to establish the relationship or the extent to which the magnitude of regional crediting is connected with the level of economic and social development of counties. On the other hand we tried to identify several groups of counties depending on the size of their credit relative to national average. We regressed GDP on loans in foreign exchange and in lei, using up to two years lags. The main result is that, as expected, both loans in foreign exchange and in lei have positive and statistically significant influence on GDP at county level. We also found that all lagged regressors are statistically insignificant and only the contemporaneous variables influence the GDP. This suggests that loans are not an important investment channel in Romania, since they are mainly used for consumption, debts payment and have only short-term multiplier effects on local economies.

Financial Dollarization: Trojan Horse for Ukraine?

The paper revisits the causes and consequences of financial dollarization in Ukraine during the past decade (monthly data). Dollarization in emerging markets plays a dual role: positive and negative. This study of financial dollarization is in the context of resident household holdings of foreign currency-denominated bank deposits and loans. If exchange rates are stable, deposit dollarization allows the withdrawal of money from the shadow economy, and loan dollarization allows the lending of long-term money, which is not possible with domestic currency due to inflation expectations. At the same time, the instability and lack of supply of foreign currencies in the market result in the collapse of household and bank finances, leading to currency risk, credit risk, and liquidity risk. Therefore, the study uses estimate indicators, the deposit dollarization index (DDI), household foreign currency deposits and loans, loan to deposit ratio (LTD), and inflation to find out the tendencies in the context of a changing domestic currency exchange rate. We present three models to reveal the influence of financial dollarization on banking stability. The first one explains the real value of domestic currency deposits through indicators such as M2 (positive), exchange rate (negative), domestic currency deposits (positive), and panic effects (negative). The second one describes the influence of the exchange rate (negative) and panic effects (negative) on foreign currency deposits. The third one explains the DDI through such the exchange rate, M2, and interest rates. The combined models provide an insight about the time necessary to stabilize the Ukrainian banking system.

The Relationship between Structural and Cyclical Features of the EU Financial Sector

In this study, we explore the relationship between certain structural features of the banking sectors in EU Member States and the performance of the respective banking sectors over the financial cycle. Using the financial cycle indicator developed by Stremmel (2015), we estimate the impact of the structural features of the banking sector on the amplitude of the financial cycle. Our results suggest that the concentration of the banking sector, the share of foreign banks, the size and stability of financial institutions, the share of foreign currency loans and financial inter-linkages contribute to the amplitude and hence the variability of financial cycles. This study provides important insights into the appropriate design of various structural and cyclical policy instruments as well.

Macroeconomic and Institutional Determinants of Non-performing Loans

Abstract This paper aims to analyse macroeconomic and institutional empirical determinants of growth of NPL ratios. Research is focused on selected CEEC and SEE countries in the period 2006- 2013. For our analysis we use static panel model approach with the logarithm of share of NPLs to total loans as a dependent variable. As independent variables we used a combination of country-specific macroeconomic and financial indicators which are commonly used in reference literature, as well as relevant institutional variables. Our results show that there is a negative relationship between increases in GDP and rise of the NPL ratio. Along with GDP, foreign currency loans ratio and level of exchange rate are positively related with the increase of NPL ratio. This confirms the expectation that countries where domestic currency is not the main medium of credit placements will have larger problems with the level of NPLs, which is even more pronounced in periods of domestic currency depreciation. In the presented models, the inflation rate is reported as statistically insignificant for sample countries. In the group of institutional variables, only financial market level of development is reported as statistically significant in relation to the level of NPL - with a more developed financial market the level of NPLs should be lower.

A new player in the field of financial affairs: the financial consumer

As a member of the EU, Hungary has to implement community norms into its legal order. The EU regulations have reached some basic institutions of the private and the business laws of the member states. The rules of consumer protection constitute the most important driving force behind the development. The current definition of the consumer intends to emphasize its weaker position in a contractual relationship. This definition seems to be in need of further specification in particular domains of transaction such as financial affairs.Recent financial scandals in Hungary, such as the case of the foreign currency loans and the bankruptcy of broker-houses and banks call attention to the need of providing special protection to financial consumers as well. In this paper, I would like to examine, whether and to what extent the concept of the financial consumer is taken into consideration in the current Hungarian economic and legal literature, and what steps should be taken to restore the balace between financial service providers and consumers. I think that the introduction of the concept would help to disseminate knowledge about financial culture, and prevent further malpractice.

Corporate foreign currency borrowing and investment: The case of Hungary

The paper investigates the impact of foreign currency lending on investment. Using Hungarian firm level data, we test whether foreign currency lending contributed to larger investment before the crisis and whether the depreciation during the Great Recession resulted in lower investment rate for firms with foreign currency loans. Results of OLS and matching estimations show that before the crisis FX lending increased investment rates and during the crisis the investment rate of firms with FX loans declined more because of the balance sheet effects triggered by the depreciation. These effects were found to be more pronounced for liquidity constrained firms.

Mortgage in the Russian Federation in January Through May 2014

Within five months of 2014, as compared to the respective period of the previous year growth in the volume of mortgage housing lending amounted to 35.96% and 44.15% as regards the number of loans and their monetary value, respectively (the respective data of 2013 against 2012: 12.46% and 24.90%, respectively). Within the above period, Rb 627.34 worth of 367,398 mortgage housing loans (MHL) was extended. As of June 1, 2014, the outstanding debt on MHL rose by 34.29% as compared to June 1, 2013 and amounted to Rb 2.97 trillion. In 2014, the share of the overdue debt in the outstanding debt on MHL in rubles decreased and as of June 1 amounted 0.92%, while that on loans in foreign currency increased within that period to 13.60%. In May 2014, the monthly weighted average rate on loans in rubles decreased by 0.1 p.p. and amounted to 12.2%, while the weighted average rate on loans extended from the beginning of the year in foreign currency gained as of June 1, 2014 0.1 p.p. as compared to May 1, 2014 and amounted to 9.6%.

Foreign Exchange Derivatives and Bank Lending in China

With the reform of the RMB exchange rate regime, China’s banks expose to more exchange rate risks and use foreign exchange derivatives to manage these risks. This paper develops a theoretical model to examine the relationship between foreign exchange derivatives and the foreign currency lending in China’s banking sector. In our model, banks choose lending activities in a way analogous to Cournot competition commonly described in industrial organization. We find there is the positive effect of the derivatives position on the total loan volumes under the condition that the von Neumann-Morgenstern utility function of bank using derivatives displays either constant or decreasing absolute risk aversion. In the empirical section, we use Vector Autoregression (VAR) model with China’s monthly data over the period from Jan 2007 to Jun 2014. Based on techniques commonly used in the VAR literature, the main results suggest that the foreign exchange derivatives transaction has bi-directional Granger causality with bank’s foreign currency loan volume, and derivatives transaction has a significantly and persistently positive effect on bank lending. Furthermore, we find that derivatives transaction accounts for over 40 percent of variations in loan volume in the long run.

Wpływ polityki banków komercyjnych na stabilność rynków finansowych

The aim of this article is to analyze the impact of commercial banks` policy on the financial mar- kets stability in Poland. This analysis leads to the conclusion that, despite the well-being of the Polish banking sector, lending and deposit banks policy should be conducted with caution. This is mainly due to the economic downturn and the ensuing increase in non-performing loans in bank portfolios. Moreover, the high share of foreign currency loans significantly reduces the impact of monetary policy instruments NBP on price of money in the economy, which is also worrying in the context of financial stability. The deterioration of the economic outlook and the continuing debt crisis in several European countries, poses a threat to the stability of the financial system in Poland.

Does Foreign Bank Entry Improve Credit Allocation and Lending Rates?: Evidence from Indonesia

This study aims to investigate the impact of the existence of foreign banks on the allocation of loans and lending rates in Indonesia. The first part of this study examines the impact of the ownership types of the foreign banks on credit allocation based on borrower types, i.e: corporations and small and medium enterprises (SMEs), and loan currency. In addition, we estimate determinants of lending rate, by taking into account the impact of foreign bank’s modes of entry, bank characteristics, macroeconomics variables, and bank market structure. This study found that foreign banks that enter the Indonesian banking market via Greenfield investments and takeover tend to channel lower proportion of credit for the SMEs. In addition, Greenfield foreign banks provide more loans in foreign currency, a result that can be explained by the notion that foreign banks have better access to world capital market and possibly serve more large firms and foreign clients in foreign currencies. The last result confirms that Greenfield banks in general charge lower lending rates on the credits.

The Weaknesses of the Albanian Banking System

Albania has inherited a one-tier centralized banking system from the socialist system. A Central Bank that had under its control two other banks: the National Commercial Bank and the Agricultural Commercial Bank. These banks had subsidiaries and branches throughout Albania. The monetary policies of this system were based on the application of direct monetary instruments such as loan limits, the deposits lower margin interest rates and the loans higher margin interest rate. The foreign currency was a monopoly of the Central Bank. After the ‘90s, the two-tier banking system was established in Albania. The Central Bank of Albania that was established had as its main objective “to achieve and maintain the price stability”. A number of commercial banks of the second-tier were established. The National Commercial Bank and the Savings Bank having entirely state-owned capital were privatized. The free movement of the Euro and the USD was allowed. Second-tier banks were allowed to accept deposits and to grant loans in foreign currency. The free movement of capital was allowed. Direct instruments were eliminated and indirect instruments were applied. The purpose of this study is to analyze the consequences of the change on the banking system, the transition from a centralized system to a two-tier banking system. The impact of the change in the areas of: economic growth, unemployment rate, inflation control, monetary base control, interest rates control in view of the dynamics of deposits and loans in Albanian Lek (“ALL”), exchange rate of the national currency, circulation of the national and foreign currency, role of national currency in the economic growth etc. By analyzing the above mentioned areas, we can determine the weaknesses of the new banking system established after the ‘90s as well as to express our views in relation to the ways and means to overcome this situation. DOI: 10.5901/mjss.2014.v5n4p87

Australian Foreign Currency Loans: Hedging or Arbitrage?

Foreign currency denominated loans (FCDLs) are an important part of corporate funding as well as an operational risk management tool. We show that Australian borrowers use FCDLs to hedge their foreign exchange risk exposure. FCDLs are found to carry an interest rate premium over domestic currency loans after controlling for borrower characteristics, loan characteristics and macroeconomic conditions. We argue that borrowers are willing to pay this premium since the marginal benefit of FCDLs as a natural hedge outweighs the marginal cost. From a lender's perspective, this premium reflects a compensation for additional foreign exchange risk exposure and intensified monitoring efforts. These results are robust to endogeneity-corrected estimations.

Demand and supply drivers of foreign currency loans in CEECs: A meta-analysis

We present a meta-analysis of the determinants of foreign currency loans in Central and Eastern Europe. We base our inferences on the results of 21 studies that provide around 800 estimated coefficients for seven determinants of foreign currency loan demand. Our results indicate that, on average, supply factors (foreign currency deposits and the minimum variance portfolio ratio) appear to play a more significant role than demand factors (interest rate differentials) of foreign currency loans. Moreover, we show that the estimates reported in the literature tend to be influenced by selected study characteristics such as the econometric methodology and their regional focus.

Total Privatization of Banks – Is it the Right or the Wrong Choice?

In this material we will address an important problem, being the answer of the question; Was the total privatization of the Commercial Banks in Albania the right thing to do? In this material we have explain why “The total privatization of the Commercial Banks in Albania”, was not the right choice! Furthermore, we will analyze and explore the system’s current status, more than 10 years after it was first applied. Detailed facts and figures have reflected the inefficient impact of the total privatization of commercial banks in the domestic economy? The areas in which we have extended our analysis are: - In the distribution of loans between sectors of production (i.e. industry, agriculture, service sectors, tourism etc..). The privatization of commercial banks has had a negative effect in some of the most important economic sectors such as agriculture, quarrying and processing industry, tourism, etc. - In the distribution of deposits and loans in Albanian Lek and foreign currency. The level of deposits and the economic growth are getting higher, however the deposits are growing at a higher rate than the economic growth. Their structure has changed in favor of foreign currency due to the lack of confidence in the Albanian lek, which has been caused by its continuous loss of value against foreign currency. This has caused the same structure in the application of loans. Foreign currency loans have a more positive effect in the rate increase of the domestic economy then the Albanian Lek loans. - In the differences between deposits and loans by type of currency. Only 50% of the deposits in Albanian Lek, with or without a maximum term, are given to economic entities in “Loan” form. The rest is used in the purchase of government debt instruments, treasury bills, while 100% of foreign currency deposits are given as loans. - In the distribution of loans by economic entities. The Loan Structure in respect of the different economic entities and different currencies is almost the same. Businesses use currency for the purchase of machinery and equipment, mostly for imports while individuals generally use the currency to make payments within the country for apartments, cars, etc. - In the distribution of loans by regions, etc… The distribution of loans shows that in general, the Albanian economy has not been supported by the right level of loans from commercial banks, therefore creating disproportionate development between different regions. Is this also one of the reasons for the declining of the population in the countryside due to it being mainly supported economically by emigrants rather than through government subsidies. The general conclusion drawn from the above data analysis is that, the total privatization of commercial banks in the Republic of Albania has had a negative consequence inthis country’s economic performance.The Albanian government should open state owned Commercial Banks. DOI: 10.5901/mjss.2013.v4n9p343

Mortgage in the Russian Federation in June 2013

In the first five months of 2013, 270108 mortgage housing loans (MHL) for the amount of Rb 435,071 bn were granted which is 12.41% and 24.86% higher than in 2012 as regards the number of the loans and their value in monetary terms, respectively. As of June 1, 2013, the outstanding debt on MHL rose by 34.91% as compared to June 1, 2012 and amounted to Rb 2,214 trillion. In 2013, the share of overdue debt in the outstanding debt on MHL in rubles decreased and amounted to 1.32% as of June 1, 2013, while that on loans in foreign currency increased within the same period to 12.15%. In May 2013, interest rates on MHL rose by 0.1 p.p. as compared to April; it is to be noted that the monthly average rate on loans in rubles amounted to 12.7%, while that on loans in foreign currency extended from the beginning of the year to 10.1%.

Information Asymmetry and Foreign Currency Borrowing by Small Firms

We model how an information asymmetry between the lending bank and the applying firm about the currency structure of firm revenues may affect loan currency choice. Our framework features a trade-off between the lower cost of foreign currency debt and the costs of currency induced loan default. We show that under imperfect information about firm revenues more local earners choose foreign currency loans, as they do not bear the full cost of the corresponding credit risk. This result is consistent with recent evidence showing that information asymmetries may increase foreign currency borrowing by retail clients in the transition economies.

Walutowe kredyty mieszkaniowe a kursy walutowe – ocena ryzyka

The aim of this paper is an evaluation of foreign exchange housing loans granted in Poland. In the paper, there was conducted research of portfolio of housing loans, its structure and changes, especially with consideration to the currency of debts. Also, a foreign currency loans profitability accordingly to the time of obtaining the loan by the debtor was analyzed. The author statistically analyzed volatility of foreign exchange rates of major currencies traded in Poland. The results were compared versus swiss franc and euro. The research indicated very high level of swiss franc volatility and risk as well as confirmed high level of risk of financing in swiss currency over euro.