Exchange Rate Risk, Banks’ Currency Mismatches, and Credit Suppy

Published: 22 December 2022| Version 1 | DOI: 10.17632/bcdr25z3df.1
Contributors:
Puriya Abbassi,
Falk Bräuning

Description

We exploit the post-Brexit depreciation of the British pound as an exogenous shock to show how exchange rate shocks transmit to the German real economy through the banking sector. To that aim, we obtain comprehensive transaction-level data for all foreign exchange forward contracts with German banks, enabling us to trace the foreign exchange risk migration before the referendum date at the bank-firm level, including important cross-industry heterogeneity in hedging demand. Moreover, because we have detailed on-balance-sheet information about banks' foreign-currency assets and liabilities, we are able to account for compositional changes in any bank's overall exposure to the pound in response to the uncertainty-induced risk migration. In addition, our analysis crucially relies on granular lending information from the German credit register at the bank-firm level to estimate post-referendum adjustments in credit supply. Finally, we use firms' income statements and balance sheet data to examine the impact on the real economy. Program files to re-produce Tables and Figures in the paper on "Exchange Rate Risk, Banks’ Currency Mismatches, and Credit Suppy"

Files

Categories

Economics, Finance, Macroeconomics, Foreign Exchange, Brexit

License