Comments on paper Peter R. Haiss and Wolfgang Rainer: “The Foreign Funds Channel at Work” By Neven Mates HNB Standard disclaimers apply

Why such a a short period? Why not data at a higher frequency? Annual data First differences model , i.e. 9 years, 8 observations per country, 13 countries. Quite small panel, but large number of independent variables. Why such a short period? Euroization was a longer process. Quarterly or monthly data must be available.

The main conclusion of the paper: Foreign owned banks were not the culprit of the loan eurization. Variable ASFB (Asset share of foreign banks) is not significant. As the model is based on first differences, this means that an increase in the asset share of foreign banks in a given year does not lead to an increase in the forex loan ratio in the same year. But ASFB is probably dominantly driven by acquisitions, not by the organic growth of operations by foreign owned banks. But the acquisition is unlikely to change the loan structure in the same year. This might explain why the ASFB simultaneous variable is not significant. But how about lags?

The main conclusion of the paper: ASFB was tested together with the FXLFXDR variable. The latter indicates the foreign funding of banks (open forex positions are restricted by regulation). Even disregarding the previous comment, it seems that the conclusion would need to be somewhat qualified: Once the access to foreign resources is accounted for, the ownership does not matter. This result was reported also in some other papers. But it begs a question: Did the foreign bank ownership increase access to foreign funding?

The second main conclusion of the paper: Trade with the Euro area matters more than the total trade. Interpreted as reflecting exporters hedging in euro. But eurization is not measured as a share of euro-loans: other loans also included. Is it easier to hedge in euros than in $? Other interpretations also possible: Faster integration in the EU improved access to foreign funding.

Endogeneity and the omitted variables issue The models explain the share of forex loans in total loans by the share of forex deposits in total deposits, which is seen as the most important determinant. But discussion of the endogeneity and omitted variables issues is absent. What about omitted variables that could drive both forex loan and deposit shares?

The effect of the exchange rate regime The dummy for the exchange rate regime is not significant in any of the 3 models. This result is not discussed in the paper… … but it is hotly debated in Croatia. Could the authors tell us more about their result?