Study On The Relationship Of Credit Risk And Interest Risk

Since 1990s, more and more practices show that interest risk and credit risk are correlated to influence the bank operation. In western countries, the credit risk model in existence is based on the assumption that the interest rate is fixed. However, as the rapid development of financial derivatives, the fixed rate hypothesis will have to be discarded concerning the future credit risk management. As the interest rate control is relaxed gradually in China, the interest rate risk has a more impact on the commercial bank; therefore, credit risk and interest risk are becoming two main risks. Because the credit risk appears earlier, it has been understood more. Currently the main credit portfolio models have sophisticated experience on measuring the default correlation, while we are still at beginning on the correlation of credit risk and interest risk.In this paper, we present the content and differences between the credit risk and interest risk, as well as the path they influent each other. By using the data of treasury bond and corporate bond during 2004 and 2006 in public, we explore relation between the duration, as the proxy of interest risk, and the credit spread as the proxy of credit risk. Furthermore, the increment of note issued by The People's Bank of China is considered as another proxy of interest risk. On one hand, the interest risk and credit risk are embedded in each other. The change of interest rate will cause the change of credit transaction cost and expense; thereby the capacity of the debtor will be lowered. The change of credit risk will let the creditor decide the price according to the risk and prevent the credit risk or put the risk at the minimum amount via price. On the other hand, it is proved that the two risks are negative related in some degree. The longer the term, the sensitive coefficients are more negative. This conclusion will help the integration management of risk. In addition, this conclusion is consistent with the previous research, except it is discussed in long-run and short-run respectively.