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The impact of foreign currency debt on credit risk; analyzing exchange rate risk in international credit markets
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This paper identifies the role of exchange rate movements as well as exchange rate volatility
as determinants of non-performing loans (NPLs) using panel data across 62 countries from
2000 to 2014. Dynamic panel data estimations suggest that a depreciation of the domestic
currency has a negative effect on NPLs: The results indicate that negative balance sheet
effects generally outweigh gains in competitiveness in international markets. Exchange rate
volatility, as a measure of uncertainty towards exchange rate movements, has a statistically
significant and strong impact on default ratios. The estimation technique accounts for possible
concerns of endogeneity, reverse causality and omitted variable bias. The results are robust to
various specifications and a subsample of emerging markets only.
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Palavras-chave
Credit risk Non-performing loans Currency mismatch Exchange rate Exchange rate volatility Dynamic panel estimation