Risk Identification And Measurement Of Interest Rate Risk Of China’s Commercial Banks And Empirical Analysis

Since the1970s, many countries have suffered from different degrees of banking crisis in or after the reformation of interest rate liberation. The reasons for all those crises, on the one hand, were due to that after interest rate liberation, the level of interest rate was getting more fluctuated and unpredictable, and on the other hand, were because of the lack of effective prevention and management of interest rate risk in commercial banks. As in recent years, with the acceleration of the process of China’s interest rate liberalization, China’s commercial banks also have to face the problem of interest rate risk. Under this background, exploring the types and resources of interest risk from the view of risk identification and researching the degree of interest rate risk exposure from the view of risk measurement are having theoretical and practical significance for China’s commercial banks’future development.The thesis uses a qualitative approach to identify the interest rate risk of commercial banks in China and made the following conclusions. First, the interest rate liberation has led to the frequent fluctuation and the overall increase in the level of interest rates which brought a periodic impact to the commercial banks in China. The frequent fluctuation of interest rate has increased the uncertainty of income and economic value of the commercial banks in China. The rise of interest rates has reduced the commercial banks’interest profits, induced the credit risk and financial expenditure shift. Secondly, based on the point of the sources of interest rate risk, China’s commercial banks used to absorbing short term deposit and lending long term loan, having a single asset and liability structure and widely using option financial products, which made them facing long term interest rate risk exposure to adverse changes in interest rate. Finally, the lack of corresponding interest rate derivatives, single profiting model and lagging interest rate risk management system further exacerbated the interest rate risk of China’s commercial banks.Meanwhile, the thesis makes an empirical analysis of the China’s inter-bank lending market, by selecting the overnight lending rate, commercial banks lending positions data (2010-2012) and using VaR model, in order to measure the interest rate risk exposure of China’s commercial banks under the market-oriented interest rate environment. Empirical analysis indicated that the introduction of GARCH model in the calculation of VaR can better simulate the distribution of the data series characteristics. And also, the relatively high VaR calculation results means China’s commercial banks are facing significant interest rate risk in the frequent interest rate volatility environment, and different types of commercial banks have different risk exposure levels because of the differences roles of lending positions.The thesis has five chapters. Chapter1is the introduction, shows some background information about the thesis. Chapter2defines interest rate risk and reviews the related literature about the commercial bank interest rate risk identification and measurement. Chapter3uses a qualitative approach to identify the interest rate risk faced by china’s commercial banks. Based on VaR model and GARCH model theory, chapter4builds the conditional heteroscedasticity model of the overnight call rate yield via the examination and analysis of the sample data, and measures the interest risk faced by commercial banks in China in a quantitative approach. Chapter5makes the conclusions of the thesis and gives some policy recommendations.