Commercial Bank Interest Rate Risk Management

With the propulsion of the innovation of the economic system and financial system, the control of the interest rate which has been practiced for a long time will slow down the pace of the development. Therefore, the People's Bank of China (PBOC) has deregulated the control of the interest rate step by step since 1978. And the People's Bank of China devotes to research the ways how to adjust the interest rate and establish the management system of the interest rate. Became the member of the WTO in 2001, the China will liberalize its financial market completely in five years according to the WTO's treaties. Meanwhile, the interest rate liberalization is an important symbol of the financial market liberalization. So, it is necessary to deregulate the control of the interest rate completely in China. According to the strategic plan of the People's Bank of China, the interest rate liberalization will be completely realized in the near two years in our country. The interest rate will be decided by the demands and supplies of the funds in the financial market. The interest rate liberalization , which will deregulate the control of the interest rate from the People's Bank of China , will cause the fluctuation of the interest rate worse and makeanother dominating market risk--interest rate risk--comes into being. Thushow to manage the risk in order to decrease losses and increase profits will be a very practical and pressing task placed in front of the commercial banks and a focal problem of the financial system innovation. Therefore, the dissertation reviews the influences to the commercial banks which the interest rate risk causes and the reasons that the interest rate risk comes into being. And the dissertation analyses the case that the interest rate risk makes the abruption of American Association of Reserves and Loans. Then, based on the researches of the interest rate's measurement and management, the dissertation firstly analyzes the identification of the interest rate risk, and subdivides the interest rate risk into four basic risks: Repricing Risk, Yield Curve Risk, Basic Risk and Embedded Option Risk. Secondly, the dissertation studies themeasuring methods of the interest rate risk, which are named as Rate—Sensitive Fund Gap Analysis, Duration Gap Model Analysis and Imitation Analysis. The dissertation researches the theory of Rate—Sensitive Fund Gap and the theory of Duration. Based on the research the dissertation collects the data of nine commercial banks in our country and analyzes those data. Through analysis, the dissertation studies the interest rate risks which are placed in front of those commercial banks and analyzes the changes of the rate-sensitive fund gaps in recent years. Selected a balance sheet of a commercial bank, the dissertation researches the sheet and analyzes the interest rate risk placed in front of this bank by Duration Gap Model. Through the practical analysis, the dissertation evaluates advantages and disadvantages of two methods to measure the interest rate risk. The dissertation studies the advanced measurement ofthe interest rate risk--VaR model. The dissertation analyzes the calculation theoryof the VaR model, analyzes concisely the methods to calculate the VaR and discusses the advantages of the VaR model to measure the interest rate risk. Thirdly, the dissertation studies the management of the interest rate risk, compares the two managing methods between adjusting the balance sheet of assets and loans and establishing the gaps of the derivation tools based on the change of the interest rate. The managing method to adjust the items in the balance sheep includes two strategies: autonomous strategy and passive strategy. Through analyzing the case of the Quaker Bank which managed the interest rate risk successfully by adjusting the items in the balance sheet of assets and loans, the dissertation studies the way how to adjust the balance sheet to avoid the interest rate risk. The more important is that the dissertation studies how to establish the gaps of the derivation tools which contain Interest rate futures. Interest rate options and Interest rate swaps in order to manage the interest rate risk.Through analyzing the discretion, the measurement and the management, the dissertation studies the special interest rate risks placed in front of the commercial banks in China. Those risks include the interest rate regulation, the problem how to make price of the deposits and loans, the problem that the commercial banks faced how to diversify their products. Analyzing the reasons that cause the interest rate risks,the dissertation studies how to manage those risks. However, managing of the interest rate risk is a kind of systematic engineering, which needs an efficient and perfect system to manage the interest rate risk. Therefore, the dissertation quests for how to establish the system of management of the interest rate risk according to the Principles for the Management of the Interest Rate Risk issued by BIS in 1997. The system of management contains two important systems: the system of measurement of the interest rate risk and the system of control of the interest rate risk.