On the roles of different foreign currencies in European bank lending
Signe Krogstrup and Prof. Dr. Cédric Tille
F32, F34, F36
Swiss franc lending, foreign currency lending, cross-border transmission of shocks, European bank balance sheets
We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Domestic lending in other currencies is used, to a greater extent, in cross-border lending, and for lending to resident nonfinancial firms, and is much less sensitive to the drivers identified for Swiss franc lending. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. The results underline that not all foreign currencies are alike when it comes to foreign currency bank lending and the associated financial stability risks.