China's Commercial Banks, Currency Mismatch Risk Research

Currency Mismatch is defined as such that an economy (or banks, non financial firms, households) whose payments (or assets and liabilities) are denominated in foreign as well as domestic currency is sensitive to exchange rate risk. If exchange rate fluctuates, those facing with much more currency mismatch problems may fall in risks of exchange loss and fragile solvency.Most Chinese banks now have a considerable net foreign currency exposure which is sensitive to exchange rate, accompanying with a mismatching maturity of foreign currency assets and liabilities. Estimating the appreciation of RMB, Chinese corporations and households will likely to keep foreign currency liabilities rather than foreign currency asset. That means the bank's foreign currency deposit will run off as the foreign currency loan keeps on increasing. While the bank's foreign currency assets and liabilities vary accordingly, the RMB counterpart of foreign exchange reserves accumulate quickly. Under the defective Sterilized Intervention policies of the Central Bank, it will be a great trouble for the Chinese commercial banks to manage the gigantic inefficient RMB assets which attribute to the RMB's richly liquidity. The banks have to meet the unprecedented challenges to matching their assets and liabilities in the foreign currency balance sheets as well as the domestic ones. It is of great practical significance to carry on the analysis on the currency mismatch of Chinese commercial banks, especially on the day when China is under the threat of the most serious financial crisis of the world.There are many pioneers who focused on the currency mismatch analysis concerning a bank's profit loss caused by the exchange rate variation. They constructed the banking crisis model based on information to describe the effects of exchange rate to the stability of a commercial bank. But few of them discussed the currency mismatch will influence the change of the commercial bank's balance sheet structure and harm to the stability of the bank's operation. As an employee of the international business department of a Chinese commercial bank, the writer of this paper attempts to use the financial acknowledges he has learned to make preliminary discussion from another view on this topic. Indicated by its definition, this paper collects and synthesizes all of those theories about the currency mismatch. On the basis of those works, the change of accounting subjects in both of RMB and foreign exchange balance sheets of the commercial bank will be systematically observed. By this way, this paper attempts to find out the real situation of Chinese commercial banks' currency mismatch under the trend of the appreciation of RMB, and subsequently disclose why it arises and how it can be solved. At the final part of this paper, some practical suggestions will be given to the Chinese commercial banks as well as Chinese policies makers.