Research On The Impact Of Bank Foreign Exchange Derivatives Business On Its Systemic Risk

With the deepening of China’s financial reform,commercial banks,which are highly involved in international financial activities,are prone to large risk exposures and therefore seek new financial products to increase revenue and hedge risks.Foreign exchange derivatives have been widely used in international trade because of their role in diversifying risks and increasing returns.However,improper operation may bring risks to banks,and if the risk allocation of one bank is wrong,it may spread to the banks concerned and lead to systemic risks.Therefore,the study of foreign exchange derivatives business has a very important role in the control of banks’ risk.Based on the existing research results,this paper firstly collates the relevant literature and explores the mechanism of the role of foreign exchange derivatives on banks’ systemic risk,which is mainly manifested as: increasing risk through speculation and mismatching,hedging risk through hedging,and transmitting risk through the role of credit expansion.Second,the panel data of 16 listed banks in China from 2011 to 2022 are selected as the study sample,and the ΔCo Va R andΔCo ES models are used to measure bank systemic risk.Again,we choose the full feasible generalized least squares(FGLS)method to test the impact of foreign exchange derivatives business on banks’ systemic risk and analyze its heterogeneity and impact mechanism.Second,heterogeneity analysis is conducted to distinguish between hedging and non-hedging foreign exchange derivatives,and it is found that hedging foreign exchange derivatives transactions can effectively reduce the likelihood of systemic risk of banks,while non-hedging types still increase systemic risk of banks.Third,there is a mediating effect of credit expansion in the impact of foreign exchange derivatives on bank systemic risk,but this mediating effect is manifested as a masking effect,which verifies the influence mechanism of "foreign exchange derivatives business-credit expansion-increasing bank systemic risk".Finally,the problems in the foreign exchange derivatives business are related to the findings of the empirical study,and relevant suggestions are made,such as small and medium-sized banks should pay attention to the ratio of hedging and non-hedging foreign exchange derivatives when engaging in foreign exchange derivatives business,and pay attention to the credit expansion before and after trading foreign exchange derivatives to keep it moderate.