A Research On Market Risk Management Of Commercial Banks In China

From 1990s, the international financial market has encountered a series of financial crises, which enforced the management and control of the market risk. With the revolution of the financial system in China, especially after the participation of WTO, the financial market becomes more open and new financial services and derivatives gradually come up into the market, which is why the banks and the administrative organization attaches a great importance to the market risk.The first part of this paper introduced the meaning and the classification of the commercial banks risk, which gave detailed descriptions of the concept and the type of market risk, and analyzed its formation causes. Market risk refers to the risk of lose in business on-and off-balance sheet of banks'led by the adverse alteration of the market price (interest rate, exchange rate, security index and price index.) In the process of the banks'operating and investing, the market price of financial instruments they hold may fluctuate because of the market factors, which in turn may cause the losses. Market risk mainly includes: interest rate risk, foreign exchange rate risk (include gold), the risk of equity volatility and commodity price risk.The second part of this paper analyzed the necessity of China's commercial banks to manage the market risk, besides, introduced the concept, the management procedures and the regulatory requirements of the market risk management of commercial banking. The management of market risk is defined as the whole process of recognizing, estimating, measuring and controlling of market risk. The purpose of market risk management is to maximize the risk-adjusted return rate through controlling the market risk into a reasonable range which is bearable for the banks. Commercial banking market risk management procedures including risk identification, measurement, monitoring and control. China Banking Regulatory Commission issued a series of management approach about commercial banks on market risk. It can be seen that the attitude and the determination to strengthen the commercial banking market risk management by our regulatory agencies.The third part of this paper systematically introduced the measurement methods of market risk of commercial banks, including in the concrete the interest rate gap analysis, duration analysis, foreign currency exposure analysis, the value at risk. These analysis methods with different levels have their advantages and disadvantages, and complement each other. At present, the international commercial banks have generally adopted the practice is to rely on the strong market risk management information system, use the interest rate gap (the foreign currency exposure) analysis method to measures the impact of current income in the bank accounts generated by the change of the interest rate (exchange rate), and use the duration analysis method to entirely measure the influence of bank economic value caused by the changes in interest rates in whole balance sheet and off the balance sheet derivatives. To use VaR analysis method to measure market risk of derivatives positions on-and off- accounts of the transaction table. From the perspective of development trends it would adopt the unified VaR model to measure market risk in the entire business on-and off-balance sheet.The forth part of this paper used an example of interest rate risk to illustrate how to calculate the market risk by using the VaR model, and analyzed the status; the significance and the prospects of the VaR model were applied in the market risk management of commercial banks. The advantages of VaR model are: The results are clear and precise, directly reflect the quantity of the risk and can be easily understood by the administrator. It definitely reflect market risk, the estimation of risk in VaR is build up on the basis of quantitative analyzing and probability, which is easy to compute and carry out, so it is suitable for internal management and risk control. There are also some difficulties of using the VaR model in our country, for example, the market efficiency hypothesis is too tough and the demand of historical data and etc. However, the model may be used in many areas. Firstly, it can raise the level of risk management of commercial banks in China. Secondly, it can improve the whole supervision of financial market. Thirdly, VaR can be used in the risk management of financial derivatives. In a word, VaR model have a great use in our financial market, it can help the banks know better about their market risk and have a clear mind of capital demands, so that they can assure themselves the ability to bear the risks and avoid financial crisis.The fifth part of this paper analyzed the problems that existed in China's commercial banking market risk management and made suggestions in view of these problems to strengthen our commercial banking market risk management. The commercial banks market risk management in our country is just at the beginning with not high management level and lack of professional personnel, especially the lack of measurement, methods, tools and system of market risk which was constraints of domestic commercial banks to enhance market risk control capacity. In accordance with the problems appeared in the market risk management of domestic commercial banks which should refer to the practice of international commercial banks, focus on strengthening market risk measurement and control capability, and further enhance the level of market risk management. Commercial banks can also take specific risk management measures, including the evade strategy, the decentralized strategy, the transfer strategy and the hedge strategy. Domestic commercial banks also should establish an independent, efficient, and improve market risk management system, including its organizational systems, strategic systems, the implementation of systems, monitoring systems and information systems.