Exchange Rate Exposures of U.S. Banks: A Cash Flow-Based Methodology

Posted: 17 Jul 2003

See all articles by Anna D. Martin

Anna D. Martin

Fairfield University - Charles F. Dolan School of Business

Laurence Mauer

St. John's University - Department of Economics and Finance

Abstract

Using a cash flow-based framework, we decompose exchange rate into short-term and long-term elements for 105 individual U.S. banks over 1988-1998. We show that significant long-term exposure is more prevalent than significant short-term exposure, reflecting the difficulty in recognizing, modeling, and managing the longer-term effects of exchange rate risk. Our analyses reveal that 72% of internationally-oriented and 88% of domestically-oriented banks in the sample have significant exposure to at least one of five currency pairs. This result supports the theory that domestic banks are exposed and should be concerned about the indirect impact of exchange rate risk. Furthermore, we provide some evidence that economies of scale may exist for institutions with extensive international operations.

Keywords: U.S. banks, Currency exposure, Exchange rate exposure, Domestic exposure, Economies of scale

JEL Classification: F31, G21

Suggested Citation

Martin, Anna D. and Mauer, Laurence, Exchange Rate Exposures of U.S. Banks: A Cash Flow-Based Methodology. Available at SSRN: https://ssrn.com/abstract=415243

Anna D. Martin (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

Dolan School of Business
N. Benson Road
Fairfield, CT 06824
United States
203-254-4000 Ext. 2881 (Phone)
203-254-4105 (Fax)

Laurence Mauer

St. John's University - Department of Economics and Finance ( email )

Jamaica, NY 11439
United States

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