When risk shifts, not shrinks: Bank portfolio responses to FX macroprudential regulation
Central Bank of Armenia
When risk shifts, not shrinks: Bank portfolio responses to FX macroprudential regulation
Working paper WP-2025-04
Viktoria Alaverdyan, Gevorg Minasyan, and Aleksandr Shirkhanyan
Abstract
This paper examines whether macroprudential foreign exchange (FX) regulations unintentionally shift currency risk to sectors not directly targeted by such measures. Using a difference-indifferences framework and a highly granular dataset combining loan-level credit registry data with bank-level balance sheet information, we analyse how Armenian banks adjusted their portfolios following the introduction of a differentiated loan-to-value (LTV) regulation that imposed stricter limits on FX-denominated mortgages. The results show that the differentiated LTV, while tightening borrowing conditions for FX-denominated mortgages, also led to an increase in the dollarization of business loans and a higher share of foreign-currency bonds in banks’ portfolios. These shifts imply that FX-related macroprudential policies can reallocate rather than reduce currency risk, emphasizing the need for system-wide oversight to prevent its build-up in unregulated segments of the financial system.