Interest Rate Market, China's Commercial Banks To Interest Rate Risk Management

The interest rate liberalization has become the inevitable trend of our nation's finance reform. The country has been pushing a freer interest rate decision mechanism and the central bank is unceasingly promoting many kinds of new action to speed up the advancement of the interest rate liberalization. The experience of many countries that have undertaken this process of interest rate liberalization shows that the transition process from rigid interest rates to a system of more flexible and market-determined rates can be traumatic if not properly managed. While the reform of the interest rate liberalization gives challenges to the management of commercial banks, it also brings chances to them, and the interest rate liberalization is also comprehensively affecting the management achievements of commercial banks. How can we deal effectively with the risk which brought by the interest rate liberalization has become the important topic of our commercial bank at present.Interest rate risk is the risk to earnings or capital arising from movement of interest rates. It arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among yield curves that affect bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-rate-related options embedded in bank products (option risk). The evaluation of interest rate risk must consider the impact of complex, illiquid hedging strategies or products, and also the potential impact on fee income that is sensitive to changes in interest rates. Changes in banks'competitive environment, products, and services have heightened the importance of prudent interest rate risk management.After the beginning of the interest rate liberalization, our commercial banks transform from the previous receiver of the interest rate into the main body who decides the interest rate level. During this role conversion process it requests our commercial banks to enhance the ability to how to determine the save and loan price in order to adapt to the fluctuating...