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Does FX Hedge Mitigate the Impact of Exchange Rate Changes on Credit Risk? Evidence from a Small Open Economy

Author

Listed:
  • Lorena Skufi

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Bank of Albania, Tirana, Albania)

  • Adam Gersl

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

Abstract

This study investigates the impact of exchange rate fluctuations on non-performing loans (NPLs), using a unique bank-by-bank dataset on lending to FX hedged and FX unhedged borrowers. Employing fixed effects and panel quantile regression, we analyze how changes in exchange rate affect the NPL ratio of hedged versus unhedged borrowers, differentiating between non-financial corporations and households and controlling for additional macroeconomic factors and bank-specific characteristics in Albania for the period from 2009 to 2023. Our empirical findings confirm that the sensitivity of unhedged non-financial corporations to exchange rate changes is higher than in the case of hedged borrowers. However, we find the opposite effect for households, where the risk seems to be for some reason higher for hedged borrowers.

Suggested Citation

  • Lorena Skufi & Adam Gersl, 2023. "Does FX Hedge Mitigate the Impact of Exchange Rate Changes on Credit Risk? Evidence from a Small Open Economy," Working Papers IES 2025/04, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2023.
    • Handle: RePEc:fau:wpaper:wp2025_04
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    File URL: https://ies.fsv.cuni.cz/en/does-fx-hedge-mitigate-impact-exchange-rate-changes-credit-risk-evidence-small-open-economy
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    More about this item

    Keywords

    Nonperforming loans; hedging; exchange rate; panel quantile regression; households and non-financial corporations;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G3 - Financial Economics - - Corporate Finance and Governance

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