Information Asymmetry and Foreign Currency Borrowing by Small Firms

Martin Brown, Steven Ongena and Dr. Pinar Yesin



JEL classification
G21, G30, F34, F37

foreign currency borrowing, competition, banking sector, market structure


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.