The developments in foreign currency lending in Hungary have come into the limelight in the past months. In our analysis, we look back on a longer period, and try to explain which factors may have influenced the structure and dynamics of foreign currency lending in this period.

Lessons from identities derived from the balance of payments suggest that in 2003 foreign market participants were less willing to take exchange rate risk and thus driving domestic agents towards foreign currency financing. In 2004 however, the continued upward trend in foreign currency lending may have originated from the domestic private sector and was also initiated by the banking sector. The widening of the banking sector’s on-balance foreign currency open position also suggest that the main driving force in foreign currency lending may not have been the increasing supply of foreign currency financing but basically the behaviour of domestic sectors.

From mid-2003 on, the increase of the interest differential (towards the euro interest rate) has contributed to the rising demand of foreign currency loans and thus also to the accelerated increase of the proportion of foreign currency financing in the flows, both in the household and in the corporate sector. In addition to the factors on the demand side,  we have to emphasize the role of the supply pressure exercised by banks, i.e. the large number of foreign currency based products.

Available only in Hungarian language.