The Use Of The Interest Rate Swap In China's Commercial Bank Interest Risk Management

Research considerationsInterest rate swap is a useful tool for interest risk management. Simplely speaking, it achieves the purpose of changing the structure of assets and liabilities through the exchanging of different cash flows, so as to change the risk exposure of the market subjects. Any market subject that needs the interest risk management for assets and liabilities can choose this tool. Banks are institutions that specialize in money business. Their assets and liabilities are highly vulnerable to the fluctuation of the market interest, so Interest rate swap is of greater significance to them. No matter for what purpose these market subjects take part in the Interest rate swap, these swaps take similar forms. Therefore, this thesis will start from analyzing the theory of Interest rate swap, in order to find the conjunction point between Interest rate swap and interest risk management of the commercial banks. Then, it will analyze the changes of the interest risk from both the assets and liabilities perspectives, and take different strategies to deal with different situations. Based on the very strategy and combined with the primary financial products, the adoptive schemes can be listed. The thesis then addresses the functions that Interest rate swap have in interest risk management of China's commercial banks. The conclusion shows that Interest rate swap theory have much flexibility in commercial banks'management and administration. However, through one year of real practice in China, it shows that the development of Interest rate swap is rather confined. So, the thesis goes on to analyze the factors that cumber its development, as well as the potential positive factors. At the end, it gives the policy suggestions to facilitate the use of the interest rate swap in China's commercial bank interest risk management.Structural arrangementThe first chapter is the preliminary remarks. It mainly explains the backgrounds and significance of this subject. Then there is a summarization of related previous research results, with the involved analysis techniques as follows. The last part is the analysis of the conditions, methods and risks of interest rate swap.The second part analyses the functions that interest rate swap have in commercial bank's interest risk management. First, on the basis of the analysis of commercial bank's option risk , this thesis reveals the changes of different directions due to the ups and downs of interests. Then it sums up with the choices of the commercial banks'interest rate swap strategies.The third part states the adoptable schemes of interest rate swap that a commercial bank can be chosen. According to the most used financial products, the thesis uses case analysis to structure interest rate swaps by using bonds and deposits and loans respectively, and validate the conclusion.The forth part is about the use of interest rate swap in China's interest risk management. First, it starts with the analysis of the operating characteristics of China's banking industry, and the significance of bringing the interest rate swap into the industry. The comes the introduction of the current operation of interest rate swaps in China, as well as the cumbering factors and positive factors. Finally, it gives the policy suggestions.The main points of this thesis1. Interest rate swap is very useful in commercial banks'interest rate swap. But the successfully use of the tool to avoid risks is based on the correct judgment on the expectations of future interest rates. Or it will bring extra loss rather than hedge the inherent risks.2. Commercial banks can use loans, deposits and bonds to structure various interest rate swaps.3. Due to the small amount of participants, similar interest rate sensitivities, the lack of bench market rate and the imperfect of the market benefit protective mechanism, the development of the interest rate swap is rather confined. It should allow more institutions to take part in the transaction on the basis of regulation compliance. Meanwhile, the bench market interest rate must be fostered so as to provide pricing basis for the interest rate swap.The innovations of this thesis It is mainly manifested by 2 aspects: First, in the analysis of the functions that the interest rate swap have for commercial banks in the second part, the existent literature basically only made general explanation and introduction, or merely analyzed from the perspectives of cost-reduction or assets return improving. On this issue, this thesis has included both the assets and liabilities analysis, and discusses the matter in different market expectations respectively. It also brings in the market restriction conditions of the option risk that a commercial bank faces, and comes to the swap strategies. The strategy risk is also analyzed.Second innovation lies in the analysis of the interest rate swap mode adopted by the commercial banks in the third part. The existent literature is relatively less. Even some addressed this matter, they only designed from the assets aspect of the commercial banks. This thesis arrives at the conclusion that if only the swap cash flows are satisfied in the strategy, the transactions can be done. It also considered the interest risk management needs from the banks'liabilities, and comes up with 7 basic modes.The shortages of this thesisWhen analyses the bank's interest sensitivity gap, the thesis only simply divides the bank's deposits and loans into fixed interest and floating interest, and excludes the deposits and loans of other natures; meanwhile, in analyzing the changing of bank proceeds during the ups and downs of the interests, the thesis also simplifies the game play between banks and clients. For example, it suggests when interest climbs, the fixed rate loans will be paid back before it is due, and the fix rate deposits will be definitely redeposited. Theses assumptions will make the status of interest rate gap and the real scene somewhat different.Among the interest swap schemes that the commercial banks can be adopted, this thesis only uses the most common deposits and loans as well as bonds, so as to influence the completeness of this scheme.In the part of analyzing the use of interest rate swap in commercial bank's interest risk management, due to author's lacking of practical experience, so part of the conclusions drawn in this part may lack of practical effect.