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

Author/Editor:

Armando Méndez Morales ; Maria del Mar Cacha

Publication Date:

November 1, 2003

Electronic Access:

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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:

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.

Series:

Working Paper No. 2003/219

Subject:

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

English

Publication Date:

November 1, 2003

ISBN/ISSN:

9781451875195/1018-5941

Stock No:

WPIEA2192003

Pages:

31

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