Exchange Rate Risk Management In Banks Based On Currency And Maturity Mismatches

Since the Chinese opening and reforming policy, companioning with the progress of economic globalization, it is becoming more and more evident that banks in various countries is internationalized, exchange rate risk will generate when different currencies are setting accounts in the bank, therefore, more and more attentions are emphasized on the control and management of exchange rate risk in the bank. June 26, 2004, the governors of the Group of Ten central bank unanimously approved the "Capital Measurement and Capital Standards: A Revised Framework"--the "New Basel Capital Accord" which is the final draft, and decided to carry it out in late 2006 in these ten countries. Basel II introduced a groundbreaking three pillars: minimum capital requirements, regulatory supervision and market discipline, it has a higher sensitivity to bank risk and the scope of monitoring is more comprehensive. In recent years, China's foreign exchange reserves continued to increase, meanwhile, because the Chinese assets and liabilities are evaluated in different currencies, which lead to the existence of currency mismatch risk. In 2007, savings deposits declined for two months, bank loaning continued to show the long-term trend, the maturity mismatch problem of deposits and loans became more and more acute. Whatever the mismatch, once there is a change in the RMB exchange rate, even if the RMB exchange rate system is changed, China's banks will immediately feel the impact of currency mismatch and maturity mismatch, from the balance sheet of banks and other financial institutions, it is easy to get the conclusions that these financial institutions will get a large number of losses.This paper draws on the researches findings and thinking of scholars home and abroad. With the data of Chinese commercial banks, we use various measurement methods to research on the exchange rate risk in Chinese commercial bank from the perspective of currency mismatch and maturity mismatch, investigate the incidence of exchange rate and split margin between two countries. The results show that: in the exchange rate risk in Chinese commercial banks, the impact of exchange rate is much higher and there is a linkage between exchange rate and split margin, therefore, exchange rate risk can also be caused by the maturity mismatch in commercial banks. In view of the big trend of banks internationalized, the development of bank Internationalized in western countries is rapid, great changes have taken place on the managing scope and style, banks of many countries set up branches or subsidiaries in foreign countries, then many banks rely on foreign currencies much more than before, Chinese commercial banks are stepping into the trend slowly. As Chinese commercial banks tend to evaluate assets and liabilities with different currency units, thus the risk of currency mismatch occur, triggering the exchange rate risk; in addition, with the rapid development of Chinese financial markets, especially the further active in capital market, our residents and business sector investment has significantly changed their asset selection behaviors and preferences, which will further lead to the structure of assets and liabilities in banks, impact of interest rates will be acted on the maturity mismatch risk.This paper introduces the currency mismatch and maturity mismatch in the basic theories and reviews the background and development of evolution home and foreign on currency mismatch and maturity mismatch. To study the exchange rate risk of Chinese commercial banks, considering the existing restrictions on data elements meanwhile, we select the net foreign exchange position and exchange gains or losses these two variables to research and measure via VaR model. In view of the majority of commercial banks in China is listed for short time, less data and other constraints, so we only select part of the commercial bank data from January 2005 to June 2009 in the empirical analysis, the bank data is extracted from the periodic reports of banks. As only cumulative quarterly data is provided in the report, we use the interpolation method to adjust the data to get estimates of monthly data. We get the of exchange rate data from the People's Bank statistics, the Chinese benchmark interest rate data ri from the Hexun macro-databases, the U.S. Federal funds rate data r f from the Federal Reserve Bank website. In this empirical analysis, there are three main state-owned commercial banks and two joint-stock commercial banks, including Bank of China, Industrial and Commercial Bank of China, Construction Bank, Shanghai Pudong Development Bank and Shenzhen Development Bank.Before doing further analysis, we first do the ADF stationary test and the cointegration test to the indexes, and then make impulse response analysis, by analyzing the graphs of response function, we conclude that our commercial banks are exposed to currency mismatch risk, that is say: rising exchange rate will result in increase of the degree of currency mismatch in state-owned commercial banks, exchange gains or losses increases, increasing exchange rate risk. Using interest rate to make impulse response analysis on the net foreign exchange position and exchange gains or losses, by analyzing the graphs of response function, we conclude that the structure of Chinese joint-stock commercial bank's balance sheet is irrational, when interest rates change, because the structure of foreign exchange assets and liabilities is hypersensitive to interest rate changes, which resulting in positive exchange losses, while the other three state-owned commercial banks do relatively better in this regard. Finally, we analyze the linkage between exchange rate and interest rate, finding out that maturity mismatch risks can transmit to the exchange rate through the interaction. According to the empirical analysis, we give advice and make suggestions on exchange rate risk management from both the aspect of micro and macro, microscopically we should strengthen risk management techniques and awareness, strictly accordance with the requirements of Basel II, to achieve 8% minimum capital requirements, supervision and market discipline; microscopically we should actively strive to offer cross-border yuan settlement, via RMB exchange swap agreement to increase the international liquidity and the usage scope of RMB and to reduce U.S. Dollars dependence.The results of this paper provides the empirical basis for identification, measurement, analysis and control and treatment on exchange rate risk from the aspect of currency mismatch and maturity mismatch in Chinese commercial Bank.