Foreign Currency Lending - Borrower or Bank Driven?

Given current concerns on foreign currency exposures in emerging economies, we examine the currency denomination of bank loans. We compare the currency requested by borrowers and the currency decision subsequently made by a bank in Bulgaria prior to the current crisis. We analyze more than hundred thousand loans to sixty thousand different firms granted during the period 2003-2007. We relate the firms’ desired and the bank’s granted currency to firm characteristics, other loan characteristics, macroeconomic conditions and the refinancing structure of the bank. We find that the bank in our sample often grants loans in foreign currency even when a firm requests a loan in local currency. The bank prefers to lend in foreign currency especially when the firm requested a long-term loan and after the bank itself received more funding in euro. These results suggest that foreign currency borrowing in Eastern Europe may be partly supply-driven with banks hesitant to lend long-term in local currency and eager to match the currency structure of their assets and liabilities.