The impact of currency depreciation and foreign exchange positions on bank lending: Evidence from an emerging market

Abstract

This study explores how currency depreciation and foreign exchange positions affect bank lending in the Philippines, where banks typically hold positive net foreign assets. We find that banks with rising foreign assets relative to liabilities expand lending during depreciation periods, particularly foreign and large banks in their USD-denominated lending. Sustained depreciations have stronger effects than temporary ones, provided they remain below a threshold. This underscores the role of both depreciation magnitude and duration in lending behavior. Foreign banks demonstrate resilience by increasing lending during depreciation periods, likely due to their access to international networks and diverse funding sources.