Do Foreign Banks Drive Foreign Currency Lending in Central and Eastern Europe?

Kingdom, United; Haiss, Peter; Paulhart, Andreas; Rainer, Wolfgang

doi:10.2139/ssrn.1343557

“…Supporting this interpretation, we find that countries that impose Capital controls display lower levels of foreign currency borrowing, suggesting that these limit the supply of foreign currency loans by banks. Thus in line with the aggregate evidence by Rosenberg and Tirpak (2008) but in contrast to the bank-level evidence by Haiss, Paulhart and Rainer (2008), our results suggest that international funding is an important determinant of loan dollarization in transition countries.…”

Section: Institutional Determinants Of Loan Currency Denominationsupporting

confidence: 84%

Foreign Currency Borrowing by Small Firms

Brown¹,

Ongena²,

Yeșin³

2009

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We examine the firm-and country-level determinants of the currency denomination of small business loans. We first model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs, and also examines the impact of information asymmetry between banks and firms. When foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firms revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. We then test the implications of our model by using a 2005 survey with responses from 9,655 firms in 26 transition countries. The survey contains details on 3,105 recent bank loans. At the firm level, our findings suggest that firms with foreign currency income and assets are more likely to borrow in a foreign currency. In contrast, firm-level distress costs and financial transparency affect the currency denomination only weakly. At the country level, the interest rate advantages of foreign currency funds and the exchange rate volatility do not explain the foreign currency borrowing in our sample. However, foreign bank presence, weak corporate governance and the absence of capital controls encourage foreign currency borrowing. All in all, we cannot confirm that "carry-trade behavior" is the key driver of foreign currency borrowing by small firms in transition economies. Our results do, however, support the conjecture that banking-sector structures and institutions that aggravate information asymmetries may facilitate foreign currency borrowing.

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“…However, as credit to households rose very rapidly between 2000 and 2007 from 7.1% to 43.3% as a percentage of GDP (Kattel 2010) and gross debt of households as % of income reached nearly 90% by 2007 (Eurostat), nearly 80% of the debt was denominated in Euros. (Haiss, Paulhart and Rainer 2009) This rendered the option of exchange rate change potentially doubly painful (soaring liabilities and falling income) and, as a consequence, devaluation was right away discarded from policy discussions. While devaluation may not have had direct impact on fiscal policy, it could have served as one probably highly necessary element in economic restructuring efforts.…”

Section: Discussionmentioning

confidence: 99%

Why Did Estonia Choose Fiscal Retrenchment after the 2008 Crisis?

Raudla

¹

,

Kattel

²

2011

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The budgetary response of Estonia to the 2008 global financial crisis poses a puzzle. While many other countries increased public expenditure and ran high deficits in 2009, the Estonian government was different: it undertook fiscal retrenchment, combining expenditure cuts and tax increases, despite a large drop in economic output. This article explains why the Estonian government opted for fiscal consolidation during the crisis. The ideological position of the governing parties and their desire the join the euro-zone played an important role in driving fiscal discipline. It also argues that the key to understanding Estonia's fiscal decisions in 2009 is what happened in the 1990s: fiscal policy choices became path-dependent as a result of positive feedback loops from previous periods of fiscal consolidation. Path-dependency was further reinforced by institutional capabilities (or lack thereof) created by initial macroeconomic policy choices.

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“…Rosenberg and Tirpak (2008) confirm that international funding is a key determinant of loan dollarization, while Luca and Petrova (2008) suggest that domestic deposits in foreign currency are also an important driver. However, these supply side explanations of foreign currency borrowing are questioned by Haiss, Paulhart and Rainer (2008) who find that foreign bank entry does not explain loan dollarization in 16 transition countries.…”

Section: Introductionmentioning

confidence: 99%

Foreign Currency Borrowing by Small Firms

Brown

¹

,

Ongena

²

,

Yeșin

³

2009

SSRN Journal

11

0

View full text Add to dashboard Cite

We examine the firm-and country-level determinants of the currency denomination of small business loans. We first model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs, and also examines the impact of information asymmetry between banks and firms. When foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firms revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. We then test the implications of our model by using a 2005 survey with responses from 9,655 firms in 26 transition countries. The survey contains details on 3,105 recent bank loans. At the firm level, our findings suggest that firms with foreign currency income and assets are more likely to borrow in a foreign currency. In contrast, firm-level distress costs and financial transparency affect the currency denomination only weakly. At the country level, the interest rate advantages of foreign currency funds and the exchange rate volatility do not explain the foreign currency borrowing in our sample. However, foreign bank presence, weak corporate governance and the absence of capital controls encourage foreign currency borrowing. All in all, we cannot confirm that "carry-trade behavior" is the key driver of foreign currency borrowing by small firms in transition economies. Our results do, however, support the conjecture that banking-sector structures and institutions that aggravate information asymmetries may facilitate foreign currency borrowing.

show abstract

Do Foreign Banks Drive Foreign Currency Lending in Central and Eastern Europe?

Cited by 7 publications

References 23 publications

Foreign Currency Borrowing by Small Firms

Foreign Currency Borrowing by Small Firms

Why Did Estonia Choose Fiscal Retrenchment after the 2008 Crisis?

Foreign Currency Borrowing by Small Firms

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