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

By Armando Méndez Morales, Maria del Mar Cacha

November 1, 2003

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Armando Méndez Morales, and Maria del Mar Cacha. The Role of Supervisory tools in Addressing Bank Borrowers' Currency Mismatches, (USA: International Monetary Fund, 2003) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Credit risk, Currencies, Exchange rate risk, Exchange rates, Financial regulation and supervision, Foreign exchange, Money

Keywords: Cash flow, Country risk, Credit risk, Currencies, Currency mismatches, Exchange rate, Exchange rate depreciation, Exchange rate risk, Exchange rates, Foreign currency, Foreign exchange position, Long position, Provisions, Prudential regulation, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/219
Stock No:

WPIEA2192003
ISBN:

9781451875195
ISSN:

1018-5941

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