The Foreign Exchange Risk Of Listed Chinese Banks

Foreign exchange risk is one of the major risks of banking companies. AfterMechanism reform of RMB exchange rate started in2005, banking institutions inChina are now facing increasing exchange risk. This empirical study on the foreignexchange exposures of listed Chinese banks is aim to provide analysis on the issue viacapital market data and the RMB exchange rate. Past studies mainly focused on thearea of direct foreign exchange exposures like accounting risk of a bank. However,indirect foreign exchange exposures arising from deteriorating environments for itscustomers since RMB appreciation also means higher risk. This paper establishes themulti-factor models by using available data due to more listed banks and moreflexible RMB exchange rate movements in recent years. It finds that negative foreignexchange exposure is prevalent for Chinese banks, reflecting that the appreciation ofthe RMB tends to reduce their equity values. Besides, foreign exchange exposure ispositive with bank sizes, which may suggest that there are larger trading positions andoperations of larger Chinese banks, and more significant impacts from theircustomers influenced by the RMB appreciation.