Research

Abstract:

Macroprudential FX regulation aims to reduce systemic risk, yet its unintended consequences remain largely unexplored. This paper provides empirical evidence that policies taxing dollar lending can widen financing disparities between small and large firms reliant on foreign currency debt. Using administrative data on the universe of formally registered firms in Peru, I examine the implementation of a FX tax by the Peruvian Central Bank. I find that a 10% increase in a bank’s exposure to the policy expands the gap in loan growth between small and large firms by 1.6 percentage points. While large firms adjust by shifting to local currency debt, credit to small firms is significantly affected. Using data on the universe of FX derivatives contracts I find that the firms most affected by the policy lack exchange rate hedging and are exposed to currency risk. Additionally, the policy’s impact is strongest in non-asset-backed loans, suggesting that borrowing constraints play a key role explaining these heterogeneous effects. These findings underscore the importance of cheap dollar credit in easing small firms' financing constraints and highlight the trade-offs involved in macroprudential FX regulation.

Abstract:

This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks' costs of foreign borrowing. (2) These higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms. (3) This size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms. (4) In contrast, interest rates on dollar-denominated loans respond homogeneously across all firms. (5) We find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms.

Abstract:

We document a novel channel through which domestic bank regulations generate cross-border real effects via international trade. Our setting is a one-time, unexpected increase in loan loss provisions in Spain in 2012. Using comprehensive administrative data from the Spanish credit register matched with the quasi-universe of firm-level trade flows from 2009 to 2013, we show that importers and exporters relying on the most affected banks experienced sharp reductions in credit supply, leading to contractions in their trade flows–especially for importers. Leveraging bilateral trade data at the country-product level, we find that Spanish imports declined overall, with little evidence of reallocation across importers. This decline in Spain's import demand spilled over internationally, reducing the total exports of Spain's trading partners, driven entirely by lower sales to Spain. The effect was stronger for countries with less developed financial systems, for exporters facing higher bilateral trade costs vis-á-vis Spain, and for products that are harder to reallocate across markets. Finally, we show that this trade channel is not explained by the foreign operations of Spanish banks. Our findings highlight international trade as a key transmission mechanism of banking regulation, with implications for the cross-border coordination of prudential policy.