The Role of Supervisory tools in Addressing Bank Borrowers' Currency Mismatches

Armando Méndez Morales and Maria del Mar Cacha

No 2003/219, IMF Working Papers from International Monetary Fund

Abstract: Bank borrowers' currency mismatches often result from unhedged foreign currency borrowing in economies where there is significant dollarization, exposing the financial sector to disguised credit risk. In the absence of standard tools or guidelines to counteract this risk, countries have resorted to outright regulatory limits in cases of moderate dollarization and to undesirable exchange controls in other cases. This paper proposes a "specific-to-group" provision rule based on the effective borrowing cost differential between domestic and foreign currency. Such a rule would help internalize the corresponding risks for banks and their borrowers in line with internationally accepted prudential and accounting standards.

Keywords: WP; foreign currency; exchange rate; Prudential regulation; currency mismatches; provisions; exchange rate depreciation; cash flow; long position; foreign exchange position; country risk; Currencies; Exchange rates; Credit risk; Exchange rate risk (search for similar items in EconPapers)
Pages: 31
Date: 2003-11-01
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Citations: View citations in EconPapers (2)

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