Foreign-currency loans and systemic risk in Europe
Pınar Yeşin 26 November 2013
Before the onset of the financial crisis, European households and non-financial firms were borrowing heavily in lower-yielding foreign currencies to finance their home mortgages or business investments, even though they did not necessarily have a steady income in the currency concerned. Five years after the financial crisis, banks still hold a substantial amount of foreign currency loans to unhedged borrowers on their balance sheets. This column quantifies the systemic risk that these foreign currency loans pose to the European banking sector.
Before the onset of the financial crisis, foreign currency loans to the non-banking sector in Europe became remarkably prevalent. In particular, households and non-financial firms were taking bank loans denominated in lower-yielding foreign currencies and investing in high-yielding domestic currencies (e.g., in the form of home mortgages or business investments), even though these agents did not necessarily have a steady income in the foreign currency concerned. Therefore these retail foreign currency loans were usually dubbed 'small men’s carry trade'.
international finance, systemic risk, foreign currency loans
Some pitfalls in global investing
Tatiana Didier, Roberto Rigobon, Sergio Schmukler 12 November 2012
Investment through global funds increases year on year. But how and where are global funds’ portfolios allocated? How and which recipient countries, underlying investors, and policymakers benefit? This column argues that global funds in fact represent restrictive investment practises. If we want as many countries, investors and companies to benefit as possible, we must aim to change global funds’ organisational structures and thereby managers’ behaviour.
Since the 1990s, a large proportion of world savings have gone to institutional investors that manage those assets by investing globally. This trend has driven a sharp increase in capital market activity and financial globalisation (cf. Obstfeld and Taylor 2004; Kose, Prasad, Rogoff and Wei 2009). Given this accumulation of resources in professional and sophisticated asset managers, you might expect to see significant international diversification accompanying this process, with many countries and companies benefiting from the influx of foreign capital.
assets, international finance, global funds, fund
Europe’s fiscal union still lacks a blueprint
Nicolas Véron 15 February 2012
Market conditions in Europe have improved of late – but this column reminds us that improvement on the turmoil of 2011 is hardly difficult. It argues that Europe’s fundamental design problems still remain unresolved and that leaders should use the market lull to prepare the next steps.
EU policies Europe's nations and regions Politics and economics
international finance, Eurozone crisis
The finance-trade-growth nexus and lessons from the past
Michael Bordo, Peter L Rousseau 26 May 2011
How interconnected are finance, trade, and economic growth? This column looks to the past in search of an answer. Examining economies that traded across the Atlantic, it finds that finance and trade reinforced one another between 1880 and 1914 but these links were absent in the post-war period. Financial development has been strongly related to growth throughout the last 130 years, whereas trade had a direct effect on growth only after 1945.
Developing and operating a financial system that fosters and sustains growth is one of today’s most pressing policy questions. The correlation between financial development and growth is well established (Levine 2005), and the roles of trade and export orientation in growth are likewise well accepted (e.g., Dollar 1992; Ben-David,1993; Edwards 1998). The finance and trade interaction, however, has been given scant attention as far as its impact on economic outcomes is concerned (e.g. Baltagi et al. 2009).
International finance International trade
economic growth, international trade, international finance, Atlantic
Financial globalisation in emerging economies: Myths and reality
Eduardo Levy Yeyati 03 April 2011
Conventional wisdom states that financial globalisation has been advancing since the mid-1980s, particularly in developing countries. It also states that this should have fostered international portfolio diversification and consumption smoothing. But this column takes a closer look at the data and argues that neither financial globalisation nor portfolio diversification has grown significantly in emerging markets over that period.
De facto financial globalisation is typically measured a proxy consisting of the ratio of cross-border assets and liabilities (averaged) over GDP. Based on data on cross-border holdings compiled by Lane and Milessi Ferreti (2007), this measure indicates that:
Development International finance
development, globalisation, emerging markets, international finance
William Jack, Tavneet Suri 16 March 2011
The success of the mobile money programme in Kenya – where money is exchanged via mobile phone – has been phenomenal. In four years, a country with only 850 bank branches has seen the number of outlets providing the service grow from 4,000 to 25,000. People have access to formal finance as never before. This column studies 3,000 households between 2008 and 2010, tracking this social and economic transformation.
Over the last dozen years, mobile telephony has spread through the developing world faster than any other technology in history. As cell phone ownership and network coverage have expanded, access to this means of communication has deepened, and the kinds of messages sent have changed, both in terms of the technology (from analog to digital, from voice to text), and in terms of content, from personal greetings, to healthcare reminders (see Aker and Mbiti 2010 for a survey).
Development Financial markets
technology, Kenya, international finance, Mobile money
The first global recession in decades
Jean Imbs 10 November 2010
What makes the global crisis global? This column argues that the interdependence of the global economy, brought about by financial linkages between developed countries as well as goods trade ties with developing countries, has made the global crisis the first global recession in decades.
The current turmoil is often argued to have had unprecedented global consequences (see Sugawara et al. 2010 for example). It is perhaps the severity of the universal consequences of a US-based shock, rather than the recession itself, that has drawn comparisons with the Great Depression (see also on this site Eichengreen and O’Rourke 2010).
This raises two questions:
Global crisis Global economy International finance International trade
international trade, global crisis, global economy, international finance
Lessons in regionalism: What can the WTO teach the IMF?
Kati Suominen 03 November 2010
Will financial regionalism damagingly fragment the global financial architecture precisely at the time when sturdy system-wide management is needed? This column points to the world trading system’s engagement with regional trade agreements as a source of lessons for how to harmonise regional and global approaches to international finance.
The epicentre of financial regionalism is Asia. Emerging East Asian economies, scarred by the IMF’s policy conditionalities during the 1997-98 regional financial crisis, are busily building national reserves and regional financial arrangements so as to wean themselves off the Fund’s influence. During the global crisis of 2008 and 2009, East Asians expanded the regional Chiang Mai swap initiative to $120 billion and multilateralised it into a regional pool.
Global economy International finance
WTO, IMF, regionalism, global economy, international finance
Foreign-currency loans in Eastern Europe: Borrower pull or bank push?
Martin Brown, Karolin Kirschenmann, Steven Ongena 13 September 2010
Foreign-currency loans in Eastern Europe are seen as a major threat to financial stability. Why then are they so widespread? This column presents evidence from over 100,000 loans made by a Bulgarian bank between 2003 and 2007. It finds that one-third of foreign-currency loans were actually requested in local currency by the firm, suggesting that banks are pushing them.
A large share of firms and households in Eastern Europe borrow in a foreign currency, i.e. the euro or Swiss franc, rather than in their domestic currency (see Figure 1). Unhedged foreign currency (FX) borrowing by the private sector is seen as a major threat to financial stability in the region and has led to a strong response from national authorities.
Europe's nations and regions International finance
Eastern Europe, international finance, Europe’s nations and regions, foreign-currency loans
Are macro-prudential policies prudent?
Gianluca Benigno, Huigang Chen, Christopher Otrok , Alessandro Rebucci, Eric Young 16 August 2010
The fallout from global crisis has left many calling for economy-wide, macro-prudential policies, such as taxes on capital flows and capital controls. This column argues that the case for such measures is ambiguous at best – the excessive borrowing on which they are predicated is not a general and robust feature of financially developed and integrated economies.
Economy-wide controls on capital inflows are back in vogue. Concerned with the latest surge in capital inflows, Brazil recently introduced a tax on international portfolio flows, and Taiwan imposed a ban on foreign funds investing in local time-deposits. Other emerging markets are either preparing or considering similar measures.
Global crisis Global governance
financial regulation, global crisis, international finance