A DR007-Based Risk Assessment On Interest Rate Risk Of Chinese Commercial Banks

With the financial market development and the deepening of interest rate marketization,the volatility of market interest rate increases gradually,leading to higher interest rate risk of commercial banks.On the National Financial Conference of 2017,financial risk control was put in the most important position,and thus interest rate assessment and management was a crucial step in this regard.It is traditionally believed that monetary policy is an effective tool to adjust market interest rate and thus to control interest rate risk.However,from the practice of major economies around the world,the role of monetary policy in this respect has been diminishing,especially in markets with full market-oriented mechanisms.Therefore,during the process of interest rate marketization,it is critical to assess and management interest rate risk in a more accurate and effective way,the basis of which is to choose an appropriate market benchmark interest rate.In this sense,it is of important theoretical and practical significance for Chinese commercial banks to make a proper choice of benchmark interest rate and interest rate risk assessment using appropriate assessment methodologies.In this paper,we first briefly introduce the background,structure,innovations and academic contribution of this research.Then based on the current literature,we summarize the existing studies from three aspects:related theories on interest rate risk of commercial banks,interest rate risk measurement methods,and interest rate risk management methods of commercial banks.We then elaborate the new characteristics of interest rate marketization in China,such as interest rate corridor and interest rate term spread overhang problems.Next,based on the classification of different currency market interest rate,we choose DR007 as the short-term benchmark interest rate for analysis.Afterwards,we conduct an empirical study that investigates the interest rate risk of Chinese commercial banks.We first analyze the normality,stability,auto correlation and ARCH effect with the dataset of DR007 from January 5,2015 to June 30,2417,and build up the EGARCH model to fit the volatility of DR007 logarithm yield,based on which we calculate the VaR value of DR007 logarithm yield.Using the dataset of nine commercial banks categorized into three groups,we then assess the short-term interest rate sensitivity gains and losses under the pressure of the risk VaR value of DR007,eliminating the scale effect.It is found that the three national joint-stock commercial banks fluctuate the most in the relative value of interest rate under the VaR value of DR007,indicating the greatest short-term interest rate risk;then comes the three large state-owned commercial banks,facing a moderate short-term interest rate risk;and finally is the three listed city commercial banks,which are relatively stable and face a smaller short-term interest rate risk.Based on all these empirical analysis,we put forward specific policy suggestions for different categories of commercial banks to manage their interest rate more effectively.