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A New Index of Currency Mismatch and Systemic Risk

Author/Editor: Ranciere, Romain | Tornell, Aaron | Vamvakidis, Athanasios
Authorized for Distribution: November 1, 2010
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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: This paper constructs a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers. This measure explicitly takes into account the indirect exchange rate risk that banks undertake when they lend to borrowers that will not be able to repay in the event of a sharp depreciation. Such systemic risk taking is not captured by indicators that are based only on banks’ balance sheet data. The new measure is constructed for 10 emerging European economies and for a broader sample that includes 19 additional emerging economies, for the period 1998 - 2008. Comparisons with previous currency mismatch measures that do not adjust for unhedged foreign currency borrowing illustrate the advantages of the new approach. In particular, the new measure flagged the indirect currency mismatch vulnerabilities that were building up in a number of emerging economies before the recent global crisis. Measuring currency mismatch more accurately can help country authorities in their efforts to address vulnerabilities at the right time, avoiding hurting growth prospects.
 
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Series: Working Paper No. 10/263
Subject(s): Banking sector | Cross country analysis | Currencies | Economic models | Emerging markets | Europe | External borrowing | Financial crisis | Fiscal risk | Loans | Sovereign debt | Time series
Author's keyword(s): Currency Mismatch | Emerging Economies | Systemic Risk | Financial Crises.
 
English  
    Published:   November 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010263   Pages:   25
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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