The impact of foreign funding exposure on bank lending and risk recognition

Abstract

This study examines how bank reliance on foreign currency deposits, a funding source sensitive to global financial conditions, affects lending behavior and forward-looking loan loss provisioning across ASEAN banking systems, and whether this relationship varies with a country's level of financial development. Using a quarterly panel of 22–23 commercial banks across six ASEAN economies (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) from 2020 to 2025, the study applies a two-way fixed effects model with bank-level clustered standard errors. The results show no significant relationship between the foreign currency deposit ratio and aggregate lending, though domestic deposit reliance significantly boosts corporate lending. For risk recognition, the aggregate provisioning result is insignificant, but a subsample of eight banks with full IFRS 9 stage-level disclosure shows a significant positive relationship. Financial development moderates the foreign funding lending relationship. Below a threshold index of 0.70, foreign currency deposits reduce lending, while above it, the effect turns positive, though only at the 90 percent confidence level.