## A New Index of Currency Mismatch and Systemic Risk

_IMF Working Papers, November 1, 2010_

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## Bibliographic details
- Authors: Romain Ranciere, Aaron Tornell, Athanasios Vamvakidis
- Published: November 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455210701.001

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### Overview
- Authors: Romain Ranciere, Aaron Tornell, Athanasios Vamvakidis
- Publication date: November 1, 2010
- Objective: Construct a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers and captures indirect exchange rate risk not visible in balance-sheet-only indicators.
- Scope: Constructed for 10 emerging European economies and for a broader sample that includes 19 additional emerging economies, for the period 1998 - 2008.
- Motivation: Existing indicators based only on banks’ balance sheet data miss systemic risk arising when banks lend to borrowers unable to repay after a sharp depreciation.

### Methodology (conceptual)
- The new measure:
  - Controls for bank lending to unhedged borrowers.
  - Explicitly accounts for indirect exchange rate risk that banks undertake via their borrowers.
- Comparative approach:
  - Compares the new measure with previous currency mismatch measures that do not adjust for unhedged foreign currency borrowing to illustrate advantages.

### Key findings
- The new index flagged indirect currency mismatch vulnerabilities that were building up in a number of emerging economies before the recent global crisis.
- Indicators based solely on banks’ balance sheet data can fail to capture systemic risk arising from unhedged foreign currency borrowing.
- More accurate measurement of currency mismatch can help authorities address vulnerabilities earlier and avoid measures that would hurt growth prospects.

### Policy implications and recommendations
- Measure currency mismatch more accurately by including banks’ exposure through lending to unhedged borrowers.
- Use the enhanced measure to:
  - Detect building systemic vulnerabilities earlier.
  - Inform timely policy responses that minimize negative impacts on growth prospects.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/a-new-index-of-currency-mismatch-and-systemic-risk-24368_