Currency position

Banks participate in foreign exchange transactions. When buying / selling them, an asset (demand) is formed in that currency, and a liability (liability) is formed in another. Therefore, banks have demand and liabilities in several different currencies that are severely affected by exchange rates.

The probability of a loss or gain as a result of a negative exchange rate change is called currency risk.

The ratio of a bank’s assets and liabilities in foreign currency determines its currency position. If the bank’s requirements and liabilities in a certain currency are equal, the currency position is closed, and in case of non-compliance it is called open. Closed regulation is a relatively stable situation in the banking sector. However, it is not possible to profit from exchange rate fluctuations with this regulation. Being open can be “long” and “short” in turn. A position is called “long” (if the requirements exceed the liabilities) and “short” (if the obligations exceed the requirements). A long position in a certain currency (when the Bank’s foreign currency assets exceed its liabilities) carries the risk of loss. The exchange rate of that currency falls. A short currency position (when liabilities in that currency exceed its assets) carries the risk of loss if the exchange rate of that currency rises.

The following operations affect the currency positions of banks:

• Receipt of interest and other income in foreign currency.

• Conversion operations with immediate delivery of funds

• Transactions with derivatives that have requirements and liabilities in foreign currency (forward and futures transactions, settlement forwards, swap deals, etc.), regardless of the method and form of settlements on such transactions.

To avoid currency risk, it is necessary to work in a closed position for each currency. Imbalances in assets and liabilities can be offset by the amount of currency received and sold. Therefore, commercial banks need to create effective currency risk management systems. The authorized bank may have an open currency position from the date of obtaining a license from the National Bank to conduct operations in foreign currency. To prevent risks or losses in foreign exchange transactions; The Central Bank sets standards for open currency positions. This approach to currency risk management is based on international banking practice, as well as the recommendations of the Basel Committee on Banking Supervision. The parameters of the open currency position in the United Kingdom are limited to 10% and 15% of the Bank’s capital, in France – 15% and 40%, and in the Netherlands – 25%, respectively.

Currency positions are recorded in the account at the end of the day. If the bank has an open currency position, a change in the exchange rate leads to either a profit or a loss. Therefore, the Central Bank is taking measures to prevent sharp exchange rate fluctuations