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Information Asymmetry and Foreign Currency Borrowing by Small Firms

Martin Brown (), Steven Ongena () and Pinar Yesin ()

No 2012-05, Working Papers from Swiss National Bank

Abstract: We model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs. Under perfect information, if foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and/or low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firm revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. Thus information asymmetry between banks and firms can be a potential driver of "dollarization" in credit markets.

Keywords: foreign currency borrowing; competition; banking sector; market structure (search for similar items in EconPapers)
JEL-codes: G21 G30 F34 F37 (search for similar items in EconPapers)
Pages: null pages
Date: 2012
New Economics Papers: this item is included in nep-ifn
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Related works:
Journal Article: Information Asymmetry and Foreign Currency Borrowing by Small Firms (2014) Downloads
Working Paper: Information Asymmetry and Foreign Currency Borrowing by Small Firms (2011) Downloads
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