Banking on foreign currency accounts: evidence from Malaysia

Abstract

PurposeThe purpose of this paper is to study how the foreign currency account (FCA) is affected by the domestic fixed deposit (FD) rate, the FCA rate, the expected exchange rate and exchange rate risk.Design/methodology/approachThis paper analyses the causal relationship between the domestic FD rate, the FCA rate, the expected exchange rate on a set of foreign currency deposits and exchange rate volatility, based on the theory of portfolio choice. Based on the theory, the panel vector autoregressive regression of fully modified ordinary least squares and dynamic ordinary least squares are modelled.FindingsThere is no cointegrating relationship for the three-month FCA deposits, the domestic FD rate, the FCA rate and the expected exchange rate. Only the six-month FCA business deposits are affected by the domestic FD rate, the FCA rate and the expected exchange rate. The FCA depositors are not affected by exchange rate volatility.Research limitations/implicationsThis study is conducted based on the FCA rate quoted by the leading commercial banks in Malaysia, Maybank. Thus, the FCA rate is used as a proxy for the FCA rate of commercial banks in Malaysia.Originality/valueIndividual depositors have to save in more than the three-month FCA to realise their expected return. For individuals, the FCA deposit is not an alternative choice to domestic FD. Exporters may use the FCA deposit to finance their foreign purchases to save the cost of foreign exchange conversion but it is still not an appropriate hedging tool against foreign exchange fluctuations as compared to the existing forward foreign exchange facility.