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Currency-Induced Credit Risk in a Dollarized Economy

Author

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  • Alejandro Arrieta Herrera
  • Jorge Guillen Uyen

Abstract

We analyze the effects of exchange rate fluctuations on corporate credit default in a dollarized economy. The application, before an exogenous exchange rate shock, of a new regulation concerning currency-induced credit risk (CICR) in the Peruvian banking system created natural conditions for a comparison between exposed and unexposed corporate borrowers. We use firm-level data to find that CICR and debt dollarization have opposite effects on credit risk. While CICR increases default, debt dollarization reduces it. Our results suggest that banks transfer exchange risk as a hedging mechanism by lending to such borrowers in dollars only.

Suggested Citation

  • Alejandro Arrieta Herrera & Jorge Guillen Uyen, 2012. "Currency-Induced Credit Risk in a Dollarized Economy," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(5), pages 105-114, September.
    • Handle: RePEc:mes:emfitr:v:48:y:2012:i:5:p:105-114
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