A New Index of Currency Mismatch and Systemic Risk

WPIEA2010263 Image
Price:  $18.00

Author/Editor: Romain Ranciere, Aaron Tornell, Athanasios Vamvakidis
Release Date: © November, 2010
ISBN : 978-1-45521-070-1
Stock #: WPIEA2010263
English
Stock Status: On back-order

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Description

This paper constructs a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers. This measure explicitly takes into account the indirect exchange rate risk that banks undertake when they lend to borrowers that will not be able to repay in the event of a sharp depreciation. Such systemic risk taking is not captured by indicators that are based only on banks’ balance sheet data. The new measure is constructed for 10 emerging European economies and for a broader sample that includes 19 additional emerging economies, for the period 1998 - 2008. Comparisons with previous currency mismatch measures that do not adjust for unhedged foreign currency borrowing illustrate the advantages of the new approach. In particular, the new measure flagged the indirect currency mismatch vulnerabilities that were building up in a number of emerging economies before the recent global crisis. Measuring currency mismatch more accurately can help country authorities in their efforts to address vulnerabilities at the right time, avoiding hurting growth prospects.

Taxonomy

Banks and banking , Currencies , Financial crisis , Financial institutions and markets , Foreign exchange , International financial system , Loans




More publications in this series: Working Papers


More publications by: Romain Ranciere ; Aaron Tornell ; Athanasios Vamvakidis