Nº 21-64: Foreign Currency Mortgages and Monetary Policy: A Heterogeneous Bank‐lending Channel

We estimate the potency of a bank‐lending channel running through the supply of mortgages granted by banks to households. Exploiting the presence of foreign currency lending in Hungary, we establish that monetary changes affect the supply of mortgage credit in volume and in its currency and risk composition. Hence, we identify a heterogeneous “bank‐lending‐to‐households” channel. While the availability of foreign currency mortgages weakens the domestic bank‐lending channel, following a domestic monetary expansion weakly capitalized banks relying on swap transactions lend more to riskier borrowers in the foreign currency, creating interaction between the currency and risk compositional channels of monetary policy.