The cost of foreign-currency lending

Manthos Delis (), Panagiotis Politsidis and Lucio Sarno

Journal of Banking & Finance, 2022, vol. 136, issue C

Abstract: Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads somewhere in the range between 5.5 and 16.1 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately 1 to 3 USD million for loans of average size and duration. We also show that this finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets, and that borrowers can lower the extra cost by forming strong lending relationships with their banks.

Keywords: Global syndicated loans; Foreign-currency lending; Exchange rate risk; Bank market power; Relationship lending (search for similar items in EconPapers)
JEL-codes: F31 F33 F34 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426621003496

DOI: 10.1016/j.jbankfin.2021.106398

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