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Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks

Author

Listed:
  • Friederike Niepmann
  • Tim Schmidt-Eisenlohr
Abstract
When firms borrow in foreign currency, exchange rate changes can affect their ability to repay the debt. Loan-level data from U.S. banks’ regulatory filings show that a 10 percent depreciation of the local currency quarter-to-quarter increases the probability that a firm becomes past due on its loans by 37 basis points for firms with foreign currency debt relative to those with local currency debt. Because firms do not perfectly hedge, exchange rate risk of the borrowers translates into credit risk for banks. Firms are more likely to borrow in foreign currency if they have foreign income and if a UIP deviation makes foreign currency loans cheaper. The paper establishes additional facts on large U.S. banks’ international corporate loan portfolios, offering a more comprehensive perspective than syndicated loan data.

Suggested Citation

  • Friederike Niepmann & Tim Schmidt-Eisenlohr, 2017. "Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks," CESifo Working Paper Series 6700, CESifo.
    • Handle: RePEc:ces:ceswps:_6700
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    4. Stefan Avdjiev & Valentina Bruno & Catherine Koch & Hyun Song Shin, 2019. "The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 151-173, March.
    5. Ahnert, Toni & Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2021. "Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?," Journal of Financial Economics, Elsevier, vol. 140(1), pages 145-174.
    6. Georgiadis, Georgios & Müller, Gernot J. & Schumann, Ben, 2024. "Global risk and the dollar," Journal of Monetary Economics, Elsevier, vol. 144(C).
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    9. Georgiadis, Georgios & Zhu, Feng, 2021. "Foreign-currency exposures and the financial channel of exchange rates: Eroding monetary policy autonomy in small open economies?," Journal of International Money and Finance, Elsevier, vol. 110(C).
    10. Sebnem Kalemli-Ozcan & Xiaoxi Liu & Ilhyock Shim, 2018. "Exchange rate appreciations and corporate risk taking," BIS Working Papers 710, Bank for International Settlements.
    11. Camila Casas & Sergii Meleshchuk & Yannick Timmer, 2020. "The Dominant Currency Financing Channel of External Adjustment," Borradores de Economia 1111, Banco de la Republica de Colombia.
    12. Wanying Song & Jian Min & Jianbo Yang, 2023. "Credit Risk Assessment of Heavy-Polluting Enterprises: A Wide- ℓ p Penalty and Deep Learning Approach," Mathematics, MDPI, vol. 11(16), pages 1-19, August.
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    More about this item

    Keywords

    cross-border banking; exchange rates; credit risk; corporate loans;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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