Households' Exposure to Foreign Currency Loans in CESEE EU Member States and Croatia

Most Central, Eastern and Southeastern European (CESEE) countries saw a substantial rise in
foreign currency lending to households during the last decade. This involved risks to macrofinancial
stability, in particular because most of these borrowers were unhedged. This paper
provides evidence on eleven CESEE countries regarding (1) the extent of foreign currency
lending to households from 1995 to 2009, (2) the supply and demand factors at work in the
period before the crisis and (3) the regulatory responses to address the situation. Panel data
estimates covering the period from 1996 to 2007 reveal that, on the demand side, foreign
currency borrowing was attractive because interest rates for foreign currency loans were lower
than those on domestic currency loans, and private sector consumption as well as housing
prices were on the rise. Mitigating factors on the supply side were higher interest margins on
domestic currency loans than on foreign currency loans and banking sector reforms. Regulatory
measures account at least partly for the different patterns of currency structures according to
descriptive evidence.