Cross-Country Exposures to the Swiss Franc

(1)

Cross-Country Exposures to the Swiss Franc

Agust´ın S. B´ en´ etrix...Philip R. Lane

... Trinity College Dublin ... Trinity College Dublin and CEPR

Conference on

Macro-Financial Linkages and Current Account Imbalances Oesterreichische Nationalbank

Vienna, 2-3 July 2015

(2)

This paper

Documents the foreign currency exposures of Switzerland in 2002-2012

Quantifies the cross-border valuation effects generated by ER fluctuations

Examines Swiss Franc holdings of ROW by looking at a sample of 116

advanced and developing/emerging countries

(3)

International Currency Exposures

B´ en´ etrix, Lane and Shambaugh (2015), “International Currency Exposures, Valuation Effects and the Global Financial Crisis,” Journal of International Economics 96: 98-109

Foreign Assets

Equity/FDI: Geography determines currency exposure Bank Loans/Deposits: BIS data

Bonds: CPIS; currency distribution of bond issuance and bond holdings FXRES: National sources; Eichengreen/Mathieson model

Foreign Liabilities

Equity/FDI: Domestic currency liabilities Bank Loans/Deposits: BIS data

Bonds: Issuance data

(4)

International Currency Exposures

Asset- and Liability Weights, Bilateral Foreign Currency Exposures and Valuation Effects

ω ^A _ijt =

k=N

X

k=1

λ ^Ak _it ∗ ω ^Ak _ijt ; ω ^L _ijt =

k =N

X

k=1

λ ^Lk _it ∗ ω ^Lk _ijt

ω ^F _ijt = ω ^A _ijt s _it ^A − ω ^L _ijt s _it ^L

NETFX _ijt ^BILAT = ω ^F _ijt ∗ IFI _it

VALXR _ijt ^BILAT = NETFX _ijt ^BILAT ∗ %∆E _ijt

VALXR it = X

VALXR _ijt ^BILAT = X

NETFX _ijt ^BILAT ∗ %∆E ijt

(5)

Aggregate Foreign Currency Position

Definition (FXAGG )

FXAGG _it = ω ^A _it s _it ^A − ω ^L _it s _it ^L

Definition (NETFX )

NETFX _it = FXAGG _it ∗ IFI _it

(6)

Swiss Currency Exposures and Valuation Effects

Decomposition of Swiss Foreign Currency Exposure

2002 2007 2012

(1) FXAGG 0.29 0.28 0.37

(2) (A − L)/(A + L) 0.14 0.11 0.14

(3) FXAGG

⁰

0.14 0.17 0.23

(A − L)/(A + L)=(4)+(5)

(4) (A

NR

− L)/(A + L) 0.13 0.10 0.07 (5) FXR/(A + L) 0.02 0.01 0.07 FXAGG

⁰

=(6)+(7)-(8)

(6) (PEQL + FDIL)/(A + L) 0.17 0.20 0.23 (7) DEBTL

^DC

/(A + L) 0.04 0.02 0.07 (8) A

^DC_NR

/(A + L) 0.07 0.06 0.07

(9) NETFX 2.63 3.38 3.74

(10) NETFX

^DEBT

1.34 1.35 2.30

(7)

Swiss Currency Exposures and Valuation Effects

Swiss VALXR

‐140

‐120

‐100

‐80

‐60

‐40

‐20 0 20 40

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

VALX

VALX (Cumulative)

(8)

Cross-country Exposures to the Swiss Franc

Exposures to Swiss Franc (2002-2012)

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

‐4 ‐3 ‐2 ‐1 0 1 2 3 4

ADV

EMDEV

(9)

Exposures to Swiss Franc and Other Currencies

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

‐45 ‐25 ‐5 15 35

Swiss Franc

Other currencies

(10)

FXAGG ^CHF Distribution

Group Year 10

^th

Percentile Mean Median 90

^th

Percentile

ALL 2002 -0.28 0.08 0.08 0.65

2007 -0.15 0.12 0.10 0.68

2012 -0.10 0.38 0.13 0.82

ADV 2002 -0.09 0.06 0.28 0.83

2007 -0.34 0.26 0.43 0.84

2012 -0.32 0.22 0.28 0.82

EMDEV 2002 -0.28 0.09 0.07 0.51

2007 -0.10 0.09 0.08 0.50

2012 -0.004 0.41 0.11 0.77

(11)

NETFX ^CHF Distribution

Group Year 10

^th

Percentile Mean Median 90

^th

Percentile

ALL 2002 -0.36 0.13 0.12 1.69

2007 -0.21 0.36 0.12 1.86

2012 -0.04 1.40 0.17 2.32

ADV 2002 -0.16 0.28 0.92 2.76

2007 -3.98 1.44 1.86 5.36

2012 -1.64 1.98 1.39 6.74

EMDEV 2002 -0.36 0.10 0.07 0.70

2007 -0.18 0.12 0.08 0.80

2012 -0.002 1.27 0.14 1.61

(12)

FXDEBT ^CHF Distribution

Group Year 10

^th

Percentile Mean Median 90

^th

Percentile

ALL 2002 -1.16 0.11 0.24 1.19

2007 -0.73 0.01 0.12 0.81

2012 -0.84 0.15 0.13 1.23

ADV 2002 -1.63 -1.14 -0.62 -0.10

2007 -1.17 -0.74 -0.39 0.06

2012 -1.38 -0.64 -0.44 0.11

EMDEV 2002 -0.38 0.44 0.35 1.49

2007 -0.07 0.21 0.17 0.87

2012 -0.01 0.36 0.21 1.26

(13)

NETFXDEBT ^CHF Distribution

Group Year 10

^th

Percentile Mean Median 90

^th

Percentile

ALL 2002 -1.96 -0.27 0.15 1.08

2007 -2.51 -0.49 0.06 0.69

2012 -1.56 -0.01 0.09 1.17

ADV 2002 -3.73 -2.76 -1.52 -0.14

2007 -4.89 -2.48 -1.26 0.19

2012 -7.14 -1.31 -0.80 0.72

EMDEV 2002 -0.30 0.39 0.30 1.21

2007 -0.05 0.04 0.09 0.78

2012 -0.004 0.34 0.12 1.38

(14)

Cross-country Exposures to the Swiss Franc Determinants

Swiss Franc vs. Other Currencies in 2002

Correl: 0.27 (ADV), 0.13(EMDEV)

USA GBR

AUT BEL

DNK DEUFRA

ITANLD NOR

SWE CAN JPN

GRC FIN

ISL IRL

PRTESP AUS NZL

−.8−.6−.4−.20.2.4.6.8ALL

−.06 −.04 −.02 0 .02 .04 .06

CHF

(15)

Swiss Franc vs. Other Currencies in 2007

Correl: 0.44 (ADV), 0.11(EMDEV)

USA AUT BELGBR

DNK DEUFRA ITA

NLD NORSWE

CAN JPN

GRC FIN ISLAUSIRLPRTESP NZL

−.8−.6−.4−.20.2.4.6.8ALL

−.06 −.04 −.02 0 .02 .04 .06

CHF

(16)

Swiss Franc vs. Other Currencies in 2012

Correl: 0.18 (ADV), -0.007(EMDEV)

USA AUT BELGBR

DNK

FRADEUITA NLD

NOR SWE JPNCAN

GRCFIN

ISL IRL PRT AUSESP NZL

−.8−.6−.4−.20.2.4.6.8ALL

−.06 −.04 −.02 0 .02 .04 .06

CHF

(17)

Regression Model

Pooled OLS for 1996, 2002, 2007 and 2012

FXAGG _it ^CHF = αFXAGG _it ^OTH + β ₁ TRADE it + β ₂ VOL it + β ₃ COV it + γ Z it + λ 1 GDP _it ^PC + λ 2 SIZE it + θY t + ε it , (1)

FXAGG

_it^OTH

is exposure to other foreign currencies TRADE

it

is bilateral trade with Switzerland scaled by GDP

VOL

_it

is a vector that includes the volatility of GDP, inflation and bilateral exchange rate COV

it

is the covariance between the change in the exchange rate and GDP growth Z

it

is a vector that includes institutional quality, capital controls, Peg and EMU GDP

_it^PC

is GDP scaled by population

SIZE

it

is the logarithm of population

Y are year dummies for 1996, 2002, 2007 and 2012

(18)

Determinants of Exposures to the Swiss Franc

FXAGG^CHF ALL ADV EMDEV

(1) (2) (3) (4) (5) (6)

FXAGG^OTH 0.003 0.003 0.004 0.018** 0.001 0.002 (0.002) (0.002) (0.008) (0.008) (0.002) (0.002)

Trade -0.013 -0.017 -0.643*** -0.695*** 0.056 0.036

(0.038) (0.035) (0.188) (0.202) (0.034) (0.030)

Vol(GDP) 0.009 0.013 0.513** 0.499*** -0.004 0.008

(0.012) (0.014) (0.207) (0.187) (0.012) (0.014)

Vol(π) 0.001 0.002 -0.496 -0.494 0.002 0.004

(0.004) (0.004) (0.465) (0.354) (0.003) (0.004)

Vol( E) 0.015* 0.009 -0.357** -0.475*** 0.010 0.007

(0.008) (0.009) (0.154) (0.162) (0.008) (0.008)

Cov(GDP,E) -0.000 -0.000 0.037** 0.046*** -0.000 -0.000

(0.000) (0.000) (0.014) (0.014) (0.000) (0.000)

Institutions -0.025 0.088 0.113

(0.061) (0.355) (0.091)

Capital controls 0.034 -0.762*** 0.032

(0.037) (0.175) (0.038)

Peg -0.210** -0.138 -0.217**

(0.090) (0.290) (0.089)

EMU -0.076 0.481 0.037

(0.204) (0.417) (0.316)

GDP^PC 0.084* 0.075 0.945* 1.003** 0.136* 0.073

(0.050) (0.055) (0.477) (0.504) (0.074) (0.057)

Size 0.053*** 0.047** 0.297*** 0.344*** 0.023 0.026

(0.020) (0.022) (0.075) (0.092) (0.022) (0.024)

Observations 569 569 105 105 464 464

R² 0.043 0.053 0.449 0.523 0.047 0.060

(19)

Determinants of Exposures to the Swiss Franc (debt only)

FXDEBT^CHF ALL ADV EMDEV

(1) (2) (3) (4) (5) (6)

FXDEBT^OTH 0.000 -0.001 0.001 0.023* -0.002 -0.004 (0.005) (0.005) (0.014) (0.013) (0.005) (0.006)

Trade -0.155 -0.078 -1.046*** -1.225*** 0.030 0.067

(0.114) (0.093) (0.335) (0.363) (0.041) (0.060)

Vol(GDP) 0.048** -0.003 1.038*** 0.972*** 0.008 -0.012

(0.024) (0.027) (0.384) (0.349) (0.023) (0.026)

Vol(π) 0.118*** 0.140*** 0.027 -0.493 0.123*** 0.135***

(0.038) (0.044) (0.792) (0.580) (0.040) (0.043)

Vol( E) -0.021 -0.044 -0.078 -0.430 -0.046 -0.053*

(0.028) (0.033) (0.270) (0.259) (0.029) (0.032)

Cov(GDP,E) -0.001 -0.001 0.015 0.023 -0.001 -0.001

(0.001) (0.001) (0.026) (0.022) (0.001) (0.001)

Institutions -0.618*** -0.510 -0.382*

(0.183) (0.579) (0.209)

Capital controls -0.038 -1.368*** -0.002

(0.053) (0.251) (0.053)

Peg -0.072 -0.539 0.064

(0.156) (0.455) (0.150)

EMU -0.468 0.477 0.564**

(0.326) (0.619) (0.239)

GDP^PC -0.187** 0.205 -1.323* -0.304 0.037 0.186

(0.076) (0.147) (0.710) (0.873) (0.099) (0.150)

Size -0.031 -0.067 0.312* 0.289* -0.038 -0.054

(0.040) (0.043) (0.166) (0.167) (0.045) (0.052)

Observations 503 503 105 105 398 398

R² 0.087 0.132 0.450 0.554 0.048 0.061

(20)

Conclusions

Summary of Findings

Swiss Currency Exposures and Valuation Effects

Switzerland has become increasingly long in foreign currency

The adverse valuation impact generated by the appreciation of the

Swiss Franc is large relative to GDP

(21)

Conclusions

Summary of Findings