Management of foreign exchange risks of commercial banks



Осуществление коммерческими банками операций в иностранной валюте приведет к открытым позициям в иностранной валюте, что является причиной валютных рисков. Кроме того, применение плавающих обменных курсов, увеличивает вероятность финансовых потерь в результате изменение курса валют. В статье рассматривается методы управления валютными рисками в коммерческих банках.

Abstract. This article is devoted to develop the specific proposals and recommendations for establishing an effective system of currency risks management in commercial banks of Uzbekistan. The basic purpose of the work is to study the experience of leading foreign banks in the field of management of FX risks and the opportunities of applying them in banking activity of the Republic of Uzbekistan.

Ключевые слова: обмен, иностранная валюта, риски, обменный курс, открытая позиция.

Keywords: exchange, foreign currency, risks, rate, open position.

Providing foreign exchange operations by banks results in open position in foreign currencies. The given positions always cause currency risks. The problem of FX risks is even more aggravated by the fact that the major currencies of the world quoted on the currency markets have floating rates. It testifies to the opportunity of significant range of fluctuation of rates. All this eventually can result in enormous losses or speculative profit. Therefore commercial banks should create effective systems of management of currency risks. Due to expansion of international operation on the global markets by banks of Uzbekistan and increase of the volume of foreign exchange operations this problem is becoming topical for banking system of the country.

The basic purpose of realization of economic reforms in Uzbekistan, is the translation of economy of republic on the originally market attitudes. In this connection special place is occupied by reform of bank system. Liberalization of import, strengthening of fiscal discipline, reduction of volume of intervention of the state in economy and privatization will be carried out everywhere. The changes in strategy have mentioned as well financial sector, including liberalization of the interest rates, reduction of direct crediting, liberalization of an input of banks in the market, privatization of state banks, and also change of the law and regulations. In these conditions the important value gets an output of banks of republic on the international money markets, expansion of operations with foreign currencies.

According to the decree of the President of our Republic “About measures on the further liberalization and reforming of bank system” from March 21, 2000 and Order of the CM RU from March 24, 2000 is determined, that for realization of policy of market reforms the formation of bank system adequate market economy is necessary. And also the maintenance of financial stability of banks, approach of their activity to world bank practice, and at the end, achievement of a high level of competitiveness of banks in the internal and external markets is determined of activation of an intermediary role of banks in the financial market.

In this article we are intend to develop the specific proposals and recommendations for establishing an effective system of currency risks management in commercial banks of Uzbekistan. The basic purpose of the work is to study the experience of leading foreign banks in the field of management of FX risks and the opportunities of applying them in banking activity of the Republic of Uzbekistan. For achievement of this purpose the following tasks are considered:

 Definition of basic kinds of FX risk arising in bank practice;

 Analysis of problems of management of FX risks of banks;

 Study of the mechanism of hedging in activity of leading foreign banks;

 Definition of traditional functions of the central banks in supervision over open currency positions of commercial banks;

 Regulatory and legislative aspects of FX risks management.

The management of FX risks in activity of banks is considered in scholarly literature in works of a number of outstanding scientists, such as David Scott, Redhead K., Walraven K.D., Peter S. Rouse(USA), Diana Mac Noton(England), A.D. Sokolinskaya, I.T. Sevruk, A.Y. Simanovskiy, L.N. Crasavina (Russia) and others.

Up to present days in our republic this problem has not been investigated as an object of scientific research. Therefore, I have tried to study the basic aspects of the problem under consideration. The subject and object of investigation is the study of the experience of leading banks, in the field of FX risk management and analysis of opportunities of their application in the activity of banks of the Republic of Uzbekistan. Practical importance of the given work is that the proposals and recommendations can be successfully applied in the activity of commercial banks and the Central bank.

The work considers the economic nature of FX risk and major the factors influencing them and it is the first attempt to consider in detail the issues connected with establishing limits and identifies problems and weaknesses of currency risk management at the commercial banks of Uzbekistan.

Here we have suggests such methods of foreign currency risk management like:

 Application of full scale forward operations;

 To fix separate limits on opening position for unstable “soft” currencies.

The methodical and theoretical basis of this work is the scientific research and works of scientists in the field of economy devoted to problems of FX risk management. The results of research of experts of the International Monetary Fund and the World Bank are also used in the investigation.

The researches resulted in the following conclusions:

 currently, FX risks restrictions in the banking system of the Republic are carried out according to the letter of the Central bank of March 28, 1998 #392 “Rules of conducting an open currency position”. According to this letter the size of an open currency position is determined as the difference the amount of foreign currency bought and sold by authorized bank. Thus the limit of an open currency position on any foreign currency at the close of each operational day should not exceed 10% and total limit 20% of own capital of the authorized bank. This document allows operating effectively a position formed from operations on purchase and sale of foreign currency. However, the rules do not contains the specific instructions as to minimization of FX risk which can be formed as a result of currency transactions of authorized banks with “soft” currencies as among the main foreign trade partners of the Republic there are CIS countries.

 owing to the fact that the main FX receipts from exports and payments for imports are made in US dollars in some major banks of the Republic there are large unilateral open positions in US dollars. This circumstance aggravates the problem of an exchange risk and, first of all, testifies to an inefficiency of exchange risk management.

 applications of future deals such as: forward transactions, contracts with options, currency futures and the currency swaps are traditional and effective control facilities of exchange risks. However in the Republic the forward transactions of futures deals haven’t been in wide use currently. The main reason for that is low liquidity of the current exchange market.

For the decision of existing problems the following is suggested:

1. Determining the size of open FX it is necessary to fix separate limits on opening positions of unstable “soft” currencies. For example, limits of CIS currencies in aggregate should not exceed 10% of the capital of bank.
2. To have an effective management of FX risks commercial banks of Uzbekistan should apply full scale forward transactions. The preconditions for such step is the following:

 the process of liberalization of national Currency market is being continued. This will inevitably exceed current liquidity of a national exchange market;

 the rate of inflation in the country is being stabilized. And it influences positively the exchange rate.

References:

1. Margaret E. Osius, BLuford H. Putham “Banking and Financial Risk managtment”. – The World Bank economic development institute, 2005.
2. Walraven K.J. “Commercial Bank Risk Management”. – The World Bank economic development institute, 2005.
3. Под ред. Красавиной Л.Н. «Международные валютно-кредитные и финансовые отношения. – М:2005. -576 с.