Template-type: ReDIF-Paper 1.0
Author-Name: Martin Brown
Author-Name-First: Martin
Author-Name-Last: Brown
Author-Person: pbr129
Author-Name: Steven Ongena
Author-Name-First: Steven
Author-Name-Last: Ongena
Author-Person: pon1
Author-Name: Dr. Pinar Yesin
Author-Name-First: Pinar
Author-Name-Last: Yesin
Author-Person: pye16
Title: Information Asymmetry and Foreign Currency Borrowing by Small Firms
Abstract: We model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs. Under perfect information, if foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and/or low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firm revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. Thus information asymmetry between banks and firms can be a potential driver of "dollarization" in credit markets.
Length: 0 pages
Creation-Date: 2012
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2012/working_paper_2012_05
File-Format: text/html
Number: 2012-05
Classification-JEL: G21, G30, F34, F37
Keywords: foreign currency borrowing, competition, banking sector, market structure
Handle: RePEc:snb:snbwpa:2012-05