| Interest rate is the core element of financial markets. It helps to determine the price of financial assets, to guide the flow of funds, and to distribute resources. Since the financial liberalization in the1970s, the world’s major developed countries have relaxed their interest rate controls and the interest rate liberalization reform has become the trend of the times. Therefore, the interest rate was then decided by the market forces of supply and demand, which enhances the effectiveness of resource allocation, and promotes financial innovations. However, interest rate liberalization does not happen overnight. While the countries as United States, Japan, South Korea etc. gained success in their reforms, the other countries and regions in the world, such as Chile and Argentina have suffered setbacks and failures. In the inevitable trend of interest rate liberalization, our country starts the pace of reform by releasing the inter-bank lending market interest in1996, and progressively advances the reform by reforming the interest rate of other markets since then. Until now, China’s over ten years of interest rate reform has basically liberalized the interest rate of money market and bond market, in accordance with the guide that’ foreign currency first, local currency later; loans first, deposit later; long-term first, short-term later, large volume first, small volume later’. After the adjustment of the benchmark interest rate of lending and borrowing, and the floating range in June and July of2012, the interest rate of loans has been almost liberalized, and the interest of deposits is also approaching full liberalization.However, what should not be ignored that the interest rate volatility brought by interest rate liberalization will directly affect the commercial banks’ assets value, cost of debt, and value of capital. Thus the interest rate risk is highly increased. The interest rate risk is one of the basic financial risks in commercial bank’s management, referring to the potential loss in banks’ raising and investing funds resulted from the changes in market interest rate. Narrowly speaking, the western traditional commercial banks’asset and liability management is the interest rate risk management. Basically, the interest rate risks faced by the commercial banks are mainly four categories:re-pricing risk, yield curve risk, basis risk and option risk. The mismatch in period of commercial banks’deposits and loans, the movements of yield curve, the asymmetric changes in deposit and lending interest, and the related businesses with optional rights will lead in to the four kinds of risks above. Besides that, China’s commercial banks are especially more vulnerable and sensitive to interest rate risk because the status quo of the narrow range of commercial banking business, the lack of product innovation, and the high dependence of revenue on interest rate spreads. More severe, long-term interest rate controls in the past left China’s commercial banks with insufficient awareness of interest rate risk, and low initiative of risk management. With the acceleration of interest rate reform, China’s commercial banks urgently need to study the interest rate risk management models and technology of advanced western commercial banks, and to establish the most suitable model considering the current situation of China’s financial market.With an early start of study and practice of interest rate risk management, western commercial banks have formed a mature theoretical system and state-of-the-art methods of interest rate risk management. The Interest Rate Sensitive Gap model, Duration Gap model, and VAR model are three main models in the field of interest rate risk management. Interest Rate Sensitive Gap model has the advantages of easy calculation and good understanding, but it measures the risk inaccurately, statically, and partially. VAR model is based on a large number of calculations and statistical data, it is a more comprehensive, dynamic and accurate measurement of the overall market risk of commercial banks. But its computational complexity and its strict demand of historical data can’t be satisfied by China’s commercial banks and the current situation of financial market in China. Therefore, VAR model is not suitable for China’s commercial banks at this stage to manage interest rate risk. The concept of duration was brought by Macaulay in1938. After that, scholars continue researching and exploring in this concept, and form a system of duration models with models such as F-W duration, effective duration, convexity duration, and random duration series model, with the idea of fixing Macaulay duration’s defects. At the same time, the duration gap model based on the concept of duration is also established in commercial banks to manage the interest rate risk. Nowadays, the Duration Gap model has become the most reliable and most widely used interest rate risk management method of commercial banks all over the world. The duration gap model takes into account the time value of money, and dynamically studies the impact of interest rates changes on the market value of the assets and liabilities of the commercial banks. Besides, the principle is clear, and the calculation is easy. So, after the systematic comparative study of all the models above, combined with China’s economic and financial reality, the Duration Gap Model is proved to have the highest applicability for the interest rate risk management of China’s commercial banks.The main contributions of this paper are as follows:(1) Firstly, it introduces comparative method to analyze the advantages and disadvantages of the Interest Rate Sensitive Gap model, Duration Gap model, and the VAR model. In order to analyze their applicability, the paper also uses the Balanced Scorecard method to grade each model respectively, considering the constraints faced by the interest rate risk management of China’s commercial banks at the current stage.(2) Secondly, the paper introduces the empirical research of Power Function, Cubic Function and Exponential Function, using the latest data of the government bond exchange market. Thus, it gets, more or less, the latest situation of the government bond market yield curve.(3) Thirdly, the paper utilizes the true, completed balance sheet data of a listed bank, and uses the bank’s specific cash flow of each items disclosed in the balance sheet, to calculate the duration gap of the bank more accurately.(4) Fourthly, the paper intends to explore the constraints faced by the interest rate risk management of China’s commercial banks under the current condition, by analyzing the difficulties encountered in empirical study. This effort helps to deepen the understanding of the Duration Gap model, and to offer some suggestions to improve the risk management of China’s commercial bank.However, this article also has several shortcomings:(1) The sample data is not sufficient when doing the empirical study of government bond yield curve, which affects the accuracy of the regression results;(2) The model is not perfect, without considering the effective duration and convexity, when doing the empirical study of Shanghai Pudong Development Bank’s FW duration gap.(3) Due to the limited use of financial derivatives in China, the paper doesn’t study the management of interest rate risk out of commercial banks’balance sheet.This article is an attempt to explore the Duration Gap model in interest rate risk management of commercial banks, based on the combination knowledge of author’s financial study and the relevant literature research. However, because of the limitation of author’s research capability, there are still some inadequacies or missing points in this paper. Your criticism and correction of this paper is highly welcome and sincerely appreciated. And your precious comments and suggestions are sure to help student to further explore and improve the research of this topic. |
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