A Study On Impacts Of The Interest Rate Derivatives On Bank's Net Interest Margin

In the process of interest rate marketization, interest rate risk has gradually become one of the main risks of commercial banks in China. If a bank doesn't manage the interest rate risk well, the bank or even the entire banking system will suffer a crisis. For example, in 1988 the United States has more than 500 savings and loan institutions facing bankruptcy because of a sharp variability in interest rate. After the crisis, US banks began to look for interest rate risk management tools. Interest rate derivatives have become one of the major banks manage interest rate risk tools. In 2005, the interest rate derivative transaction in China commercial bank is about 780 billion yuan. At the end of 2014, transaction scale become 2.33 trillion yuan. The average annual growth rate is 112.87 percent. The interest rate derivatives trading in China commercial banks has been developing rapidly in process of interest rate marketization. Interest rate derivatives will have impacts on the bank's net interest margin decision in the management of interest rate risk.This paper research the impacts of interest rate derivatives on bank's net interest margin with two-stage regression to separate spread from bank's net interest margin. To analysis the impacts of interest rate derivatives on pure spread and adjusted spread from theoretical and empirical aspects, and then to analysis the impacts of interest rate derivatives on bank's net interest margin. Conclusions are as follows:first, the use of interest rate derivatives significantly affects pure spread and banks which using those interest rate derivatives decrease pure spread demand; second, transactions of interest rate derivatives increase bank adjusted spread, mainly due to interest rate derivatives trading enable banks to maintain a larger interest rate sensitivity gap. It reveals the impact of interest rate derivatives on risk management of China's commercial banks, firstly banks reduced the sensitivity to interest rates volatility from the perspective of risk consciousness; secondly banks may hold a larger interest rate sensitivity gap in assets and liabilities management to get a higher risk premium which increases the bank's interest rate risk exposure.