Credit Euroization in Eastern Europe: The ‘Foreign Funds’ Channel at Work

This paper aims to analyze the process of credit euroization in Emerging Europe and to investigate the motives of borrowers and lenders to engage in foreign currency lending. We empirically test for drivers of credit euroization in 13 European post-transition countries over the pre-crisis period 1999–2007. We find evidence that underpins the concept of the foreign funds channel, which asserts that credit euroization is driven by foreign borrowings, regardless of whether the funds are channeled into the system via subsidiaries of foreign banks (foreign bank channel) or via domestic banks borrowing abroad.