The Impact Of Commercial Banks Currency Mismatches On The Stability Of Commercial Banks In China

With the deepening of external economic development,China has accumulated a large amount of foreign exchange reserves in the process of external import and export trade and economic investment,which has led to a large scale currency mismatch in China.The risk of currency mismatch in China is concentrated in commercial banks as the main financial body.Coupled with the reform of the exchange rate system,the floating of the exchange rate has to some extent affected the net value movements in the balance sheets of commercial banks and further affected the stability of commercial banks and possibly even the stability of the Chinese economy.In this context,it is important to study the relationship between debt-based currency mismatches and the stability of commercial banks in China in order to prevent and mitigate the currency mismatch risks of commercial banks.This paper firstly starts from the background of the current situation of currency mismatch in China,and outlines the characteristics and risks of currency mismatch in commercial banks by combing through the relevant literature on currency mismatch and commercial bank stability,clarifying the current status of research,research background and relevant concepts.This is followed by a theoretical analysis,which provides an analytical overview of the theoretical basis between the impact of currency mismatch on commercial bank stability,the impact mechanism,and derives the basic hypotheses of this paper.Based on the theoretical analysis and the current situation of currency mismatch in China,a two-way fixed-effects model is constructed to empirically analyse the relationship between currency mismatch and commercial bank stability based on a sample of 16 commercial banks from 2006 to 2021,including five state-owned banks,eight joint-stock commercial banks and three city commercial banks.The empirical results were tested for endogeneity using the instrumental variables approach.In addition,a channel test was conducted by adding the interaction term between net foreign currency exposure position and exchange rate according to the transmission mechanism of currency mismatch risk,and a heterogeneity test was conducted by differentiating the sample into state-owned commercial banks,joint-stock commercial banks and urban commercial banks and by size.The results show that the impact of currency mismatches on the stability of commercial banks is significantly negative,indicating that an increase in the size of currency mismatches contributes to a decrease in the stability of commercial banks in China,and that the impact is transmitted through the exchange rate.For China,the impact of currency mismatches on commercial bank stability is more significant for state-owned banks than for other types of commercial banks,and the negative impact of currency mismatches on commercial bank stability is greater for commercial banks with larger assets.In addition,a mutation point analysis of China’s currency mismatch was conducted using the pettitt test,with dummy variables and interaction terms between dummy variables and net foreign currency exposure positions set at the 2015 node in the sample,which revealed that the 2015 policy had somewhat dampened the negative impact of currency mismatch on commercial bank stability.Therefore,it is necessary to fundamentally control the scale of currency mismatches in China,promote the process of RMB internationalisation,maintain exchange rate stability,strengthen prudential supervision of commercial banks and enterprises,better manage the currency mismatch risk of commercial banks and improve the stability of commercial banks.