Foreign currency loan conversions and currency mismatches

Andreas M. Fischer and Dr. Pinar Yesin

Issue
2019-04

Pages
40

JEL classification
F15, F21, F32, F36, G15

Keywords
Loan conversion programs, emerging markets, currency mismatch

Year
2019

This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period. Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased currency mismatches in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.