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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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    10. 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.
    11. Hardy, Bryan, 2023. "Foreign currency borrowing, balance sheet shocks, and real outcomes," Journal of International Money and Finance, Elsevier, vol. 139(C).
    12. Gita Gopinath & Jeremy C Stein, 2021. "Banking, Trade, and the Making of a Dominant Currency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 783-830.
    13. Colin Weiss, 2020. "Contractionary Devaluation Risk: Evidence from the Free Silver Movement, 1878-1900," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 705-720, October.
    14. Alfaro, Laura & Asis, Gonzalo & Chari, Anusha & Panizza, Ugo, 2019. "Corporate debt, firm size and financial fragility in emerging markets," Journal of International Economics, Elsevier, vol. 118(C), pages 1-19.
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    20. Sérgio Leão & Rafael Schiozer & Raquel F. Oliveira & Gustavo Araujo, 2022. "Lending Relationships and Currency Hedging," Working Papers Series 565, Central Bank of Brazil, Research Department.
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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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