FX intervention and domestic credit: Evidence from high-frequency micro data

BIS Working Papers  |  No 774  | 
18 March 2019



When a central bank buys or sells foreign exchange, these market interventions not only influence the exchange rate, but also the lending by domestic banks to domestic borrowers. The reason for the additional impact on domestic credit comes about because borrowers' creditworthiness fluctuates with the value of the currency. When credit is judged to be growing too rapidly to maintain an even keel for the economy, intervention in the currency may therefore have a place in the monetary policy toolkit of the central bank.


We use a rarely available high-frequency central bank database of FX trades conducted by the Bank of the Republic, Colombia, and combine it with detailed bank-by-bank daily flow data on new loans to corporates covering the entire Colombian banking system. The data's high frequency, together with the panel structure of the entire credit registry, lets us make a rigorous study of how FX interventions might influence domestic bank lending. To our knowledge, our paper is the first to draw on such a database to study how financial stability might be affected by sterilised FX interventions.


Our findings lend support to the proposition that sterilised interventions, ie those accompanied by central bank monetary operations to keep interest rates unchanged, can help to slow credit growth at times when heavy capital inflows are driving up the domestic exchange rate. First, we find that sterilised FX purchases have a significant and persistent dampening effect on new domestic bank lending. Second, sterilised FX purchases weaken the domestic currency and reduce capital inflows. Third, central bank open market operations, even those unrelated to FX interventions, also reduce domestic lending. However, the estimated effect is much smaller than that of FX interventions. This highlights the importance of the exchange rate in transmitting the effects of an intervention to lending. Fourth, we find that sterilised FX purchases dampen lending growth more strongly at banks with weaker balance sheets.



We employ a unique central bank dataset of foreign exchange operations to study the impact of FX intervention on domestic credit. Using loan-level data in the credit registry, we find that sterilized purchases of dollars by the central bank dampen the flow of new domestic corporate loans. The impact is particularly strong for borrowers with larger currency mismatches and for banks with thinner capital buffers. Our analysis sheds light on the role of FX intervention as part of the macroprudential toolkit during credit booms associated with episodes of capital inflow surges.

JEL classification: E58, F31, F33, F41, G20

Keywords: FX intervention, credit registry, emerging markets, financial channel of exchange rates