When Risk Shifts, not Shrinks: Bank Portfolio Responses to FX Macroprudential Regulation

Viktoria Alaverdyan, Gevorg Minasyan and Aleksandr Shirkhanyan ()
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Aleksandr Shirkhanyan: Central Bank of Armenia

No WP-2025-04, Working Papers from Central Bank of Armenia

Abstract: This paper examines whether macroprudential foreign exchange (FX) regulations unintentionally shift currency risk to sectors not directly targeted by such measures. Using a difference-indifferences framework and a highly granular dataset combining loan-level credit registry data with bank-level balance sheet information, we analyse how Armenian banks adjusted their portfolios following the introduction of a differentiated loan-to-value (LTV) regulation that imposed stricter limits on FX-denominated mortgages. The results show that the differentiated LTV, while tightening borrowing conditions for FX-denominated mortgages, also led to an increase in the dollarization of business loans and a higher share of foreign-currency bonds in banks' portfolios. These shifts imply that FX-related macroprudential policies can reallocate rather than reduce currency risk, emphasizing the need for system-wide oversight to prevent its build-up in unregulated segments of the financial system.

Keywords: Macroprudential policy; Foreign exchange regulation; Loan-to-value limits; Dollarization; Bank portfolio reallocation (search for similar items in EconPapers)
JEL-codes: E44 E58 F31 G21 G28 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2025-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-inv and nep-mon
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