Interest Rate Risk Measurement Of Chinese Commercial Banks

With the speeding up of the reform of interest rate risk liberalization, Chinese commercial banks pay more and more attention on this field. Until now, only the upper limitation on deposit interest rate and lower limitation on credit interest rate have not liberalized by the People's Bank of China.Interest rate risk is the exposure of a bank's financial condition to adverse movements in the interest rates. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive interest rate risk can pose a significant threat to a bank's earnings and capital base. Changes in interest rates affect a bank's earning by changing its net interest rates also affect the underlying value of the bank's assets, liabilities and off balance sheet instruments because the present value of future cash flows change when interest rate change. Reprising risk, yield curve risk, basic risk and option are four major sources of interest rate risk.The Basel Committee on Banking Supervision always stresses the supervision on interest rate risk. And you can find that the terms governing this risk moves from the first pillar to the second pillar in the New Basel Capital Accord. The reason of this change is that it's hard to measure the interest rate risk and formulate a single criterion on the capital charge for this risk. But it doesn't mean the interest rate risk is beyond the requirement of capital adequacy.How to measure the interest rate risk becomes an important question.In this article, I introduce four common ways, GAP, Duration, OAS and VAR of interest rate risk measurements. It puts the measurement of the interest rate in the core which is crucial but difficult to explore in the research and tries to seek the most suitable measuring method on the basis of learning from the interest rate risk of capital measurement in western banks, accompanied by the empirical evidence with the actual data in Chinese banks, then proposes the feasible solution to the problems detected in the research. With the concern of the cost and profitability, I choose to use duration plus GAP as a proper way to measure the interest rate risk. But with the complexity and formality of bank's business, using OAS and VAR is the tendency in the future.