Interest Rate Risk Management Of Commercial Banks During The Process Of Interest Rate Liberalization

Interest rate is one of the most important variables in financial market. Changes of interest rates have significant effects on the whole financial market as well as our daily life. The point of view of interest rate deregulation becomes main stream along with the interest rate regulated-policy lost its advantage. Now,it is common sense that interest rate should be decided by market force rather than by the officer in planed economy. Along with the entrance of WTO and promise to open to the world step by step, interest rate deregulation now becomes part of agency of monetary administration in China.At present, interest rate deregulation has changed the commercial banks'living environment and their behavior. So, it is very important to research on the interest rate risk management deeply during the process of interest rate liberalization. This article analyzes the feature of interest rate deregulate process in China and discusses the issue of commercial banks'interest rate risk management.In this article, based on the background of interest rate deregulation, and by the standpoint of commercial banks, the author reviews the history and reality of interest rate risk management, and try to find out the logic of interest rate deregulate process so that one can preview the future development. Such development path should impact on the term structure and risk structure of interest rates. After review the theoretical and empirical research of the term structure and risk structure of interest rates, utilizing the information get from the structure of the interest rates, this paper discusses the issue of pricing loan by combining the risk factors and embedded implicit options of loan. Then, the author discusses how the promotion of interest rate liberalization impact on the decision of investment and finance of commercial banks. At the end of this article, the author discusses how to imply the idea of spread options to the interest rate risk management of commercial banks and provides a new angle to interest rate risk management. This article includes three parts .Part one includes chapter one and chapter two, which reviews the theory of interest rate risk management and the interest rate liberalization reform in China. Chapter three and chapter four are the second part, which research the term structure and risk structure of interest rates empirically. Part one and part two form the basis of the third part, which is the application of interest rates'structure. The rest of the article, that is, from chapter five to chapter seven compose the third part and chapter eight is conclusion and something need furthur discussion.After discusses the methodology applied in this article and some innovation points in preface, in Chapter one, the authour reviews the development path of interest rate risk management and the reality of risk management in China. Firstly, Chapter one analyzes the complicated and variable environment in which commercial banks lie. And government's liberalization of interest rate exposes the commercial banks to interest rate risk. Then Chapter one analyzes the measurement model of interest rate risk as well as some interest rate derivatives.Also in Chapter one the author discusses the interest rate risk management situation in China and points out that interest rate risk management will be one part of commercial banks daily management activities.In chapter two, after review the historical development of interest rate liberalization, the author draws the characteristics of the interest rate reform, tries to find out the underlying logic of reform and gives a reasonable explain to the path of interest rate liberalization in China. The author also points out that the interest rate reform is directed by government and the speed of reform relys on the affordability of economy and trade-off between cost and return of reform.In chapter three, the author reviews the theory and methodology of modeling interest rates term structure and provides some empirical evidences of term structure of interest rates in China. The empirical results suggest that the Chinese term structure of interest rates consistents with the main stream idea of positive term premium. The empirical results also show obvious difference of the yields between government bond market and inter bank market.Chapter four gives some empirical evidences of interest rates risk structure curve instead of credit spread. The author tries to measure the corporations'risk by their own past trade information to research the risk structure of interest rate. By the information getting from chapter three and chapter four, the author try to pricing the commercial banks'loan by combining RAROC Model with OAS Model. Then, the author provides a more accurate price of loan. Unfortunately, confined by data scarce, the author does not give actual application.In chapter six, the writer further discusses the commercial banks'behavior of investment and finance during the process of interest rate deregulating. The author show the interest rate reform does affect the behavior of commercial banks and lead to unexpected behavior, especially when commercial banks faced with serious SBC (soft budget constraints).Chapter seven discusses the possibility to how to improve the performance of interest rate risk management by utilizing the basic idea of spread options. The Chapter views the interest rate difference between savings and loan, different interest rate by different finance channel and different interest rate of different investment means as spread. Then try to apply the idea of spread options to manage the interest rate risk of commercial banks. The last chapter gives conclusion and some issues waiting for further research.