THE EXCHANGE-RATE EXPOSURE OF US AND JAPANESE BANKING INSTITUTIONS

In this paper, we examine the foreign exchange exposure of a sample of U.S. and Japanese banking firms. Using daily data, we construct estim ates of the exchange rate sensitivity of the equity returns of the U.S . bank holding companies and compare them to those of the Japanese ban ks. We find that the stock returns of a significant fraction of the U. S. companies move with the exchange rate, while few of the Japanese re turns that we observe do so. We next examine more closely the sensitiv ity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sen sitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a signifi cant, though only partial, picture of the exchange rate exposure of U. S. banking institutions. The cross-sectional evidence is also consiste nt with the use of foreign exchange contracts for the purpose of hedgi ng. (C) 1997 Elsevier Science B.V.