This paper first reviews the developments in the size and composition of the European banking sectors’ balance sheets since the Global Financial Crisis and then assesses the impact of foreign currency loan conversion programs on systemic risk. Aggregate data from 2009Q1 to 2019Q3 indicate three major developments. First, the deleveraging process in Europe has been sizeable, while credit growth may be hampered in several countries. Secondly, macroprudential measures and conversion programs have only partially achieved their goal of lowering financial dollarization in Central and Eastern Europe. Lastly, systemic risk remains elevated in the non-euro area.
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The BIS Locational Banking Statistics are compiled following principles that are consistent with balance of payments statistics.
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Foreign currency loan conversion programs generally reduced the value of total assets in banks’ balance sheets by converting CHF loans into another currency at an exchange rate below the effective market value at the time of the conversion. As a result, these programs may have contributed to the deleveraging process.
Exchange rate movements undoubtedly affect the evolution of the share of foreign currency loans to total loans through valuation changes. Yet, the figure does not exhibit any evidence that valuation changes slowed or reversed the downward trend in the financial dollarization of loans, despite the sharp appreciation of the Swiss franc vis-à-vis the euro during this period.
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The authors would like to thank an anonymous referee and Paul Wachtel (the editor), as well as Romain Baeriswyl and Andreas Fischer for valuable comments. Pınar Yeşin would like to thank conference participants at the 25th Dubrovnik Economic Conference for helpful discussions on foreign currency loan conversion programs in Central and Eastern Europe. Any remaining errors are our own. The views expressed in this paper are those of the authors and do not necessarily represent those of the Swiss National Bank.
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Vidaházy, V., Yeşin, P. Deleveraging and Foreign Currency Loan Conversion Programs in Europe. Comp Econ Stud 62, 215–241 (2020). https://doi.org/10.1057/s41294-020-00116-1
- Foreign currency lending
- Financial dollarization
- Loan conversion programs
- Systemic risk