Why do firms default on their foreign currency loans? The case of Hungary

•Decomposition of default rates of foreign currency (FX) borrowers into currency and composition effects.•Less creditworthy firms are self-selected to FX loans, currency shocks further weakened their loan performances.•More creditworthy firms that were well-prepared for the currency risks also borrowed in FX.•The institution of FX lending and the characteristics of borrowers have to be jointly examined.