Systemic Risk and Foreign Currency Positions of Banks : Evidence from Emerging Europe

This paper investigates the impact of foreign currency (FX) denominated assets and liabilities on systemic risk using a unique hand-collected dataset of bank-level FX positions for the period 2005-2012. The sample consists of banks from Central and Eastern Europe with large share of FX exposures in balance sheet. Empirical findings indicate that systemic risk is dependent on the currency choice of financial institutions. While FX positions denominated in EUR and USD do not pose systemic risk concerns, FX positions denominated in exotic currencies like CHF significantly enhance banks' systemic importance. The negative influence of CHF positions might be reduced through prudent corporate governance mechanisms, tight restrictions on banking activity and more restrictive limits on foreign currency lending in the home countries of bank holding companies