Foreign currency lending

Delis, Manthos and Politsidis, Panagiotis and Sarno, Lucio (2018): Foreign currency lending.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Global syndicated loans; Foreign currency lending; Exchange rate risk; Bank market power; Relationship lending
• Subjects: F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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