The increase in euro-denominated bank lending and deposits across parts of CEE in recent years – due in part to high domestic inflation and interest rates – looks like a concern on the surface, but there are reasons to think it doesn’t pose a significant financial stability risk. Unlike in the 2000s when the surge in FX household borrowing resulted in systemic banking risks, most of the rise today has been in the form of FX borrowing by non-financial corporates which have a natural hedge (thanks to FX income streams).
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