China's Commercial Banks To Interest Rate Risk Capital Measurement Methods Discussed

The publishing of the International Convergence of Capital Measurement and Capital Standards: A Revised Framework in 2004, gave the banking new requirements. As the first pillar of BASIL II framework, capital adequacy ratio would be more sensitive measured, compare to the BASIL I. Market risk capital requirement was the new element, which is more important in the financial crisis.In our country's RMB financial market, interest rate risk is a major problem in the market risk. BASIL II gives us two approaches to calculate the interest rate risk: standard approach and internal model approach. The first one should be fixed by regulatory authority. And the second one is base on the internal VaR model which is used for risk management by the bank.Up to now, no one have been approved to use internal model approach to calculate interest rate risk in our country. Some banks taken quite big interest rate exposure are preparing to apply use internal model approach. But they have to use standard approach before getting approval by regulatory. So this paper will compare the results of two approaches and give some advices.Since the RMB financial market is still immature, the result of internal model approach can not save the capital. The reason is because of the currency policy, inactivity of the bond market, IPO of the capital market, etc. However, we trust the result would be better with the data washing and market enhance. Hence the commercial banks should strengthen themselves for using internal model approach to calculate interest rate risk's capital requirement.After the recent financial crisis, members of the BASIL committee reviewed the approach of market risk capital calculation. They also raised some incremental capital requirement and prudential guideline.