Market interest rate market risk management and business banking market

market-oriented commercial bank market interest rate

1, China's interest rate market reform

so-called interest rate market refers to the financial institutions operating in the
money market interest rate on the financing of market supply and demand.
Specifically, the interest rate market is the deposit and lending rates by
commercial banks to changes in market supply and demand of funds from the
main regulator, the final form to the central bank's benchmark interest rate lead
to interest rate is the benchmark rate for the financial markets, various interest
rates remain reasonable effective conduction layer spreads and interest rate
system. Interest rate market is building a socialist market economic system, to
play the role of market allocation of resources, an important part, is to
strengthen our financial indirect control of the key, is to improve the mechanism
for financial institutions to make their own decisions, a necessary condition for
competitiveness.
1993, the Third Plenary Session of the Chinese Communist Party 14 "on the
establishment of a socialist market economic system, a number of issues" and
"the decision of the State Council on the financial system," market-oriented
reform of interest rates raised the basic idea. In 2002, the Party Congress report
reiterated that "steady progress in interest rate reform, optimize the allocation of
financial resources." In 2003, the party's Plenary Session "on perfecting the
socialist market economic system, a number of issues" and further states that
"steadily promote interest rate liberalization, establishment of a sound market
determines the interest rate formation mechanism, the central bank through the
use of monetary policy tools to guide the market interest rate. " CPC Central
Committee, the State Department's series of important decisions for the interest
rate marketization reform and the direction. Interest rate reform of the general
idea as follows: the first open money market interest rates and bond market
interest rates, and then gradually advance deposit and lending rates to the
market. Deposit and loan rates the market in accordance with the "first foreign
currency, after currency; first loan, after the deposit; first long-term, large, after
the short-term, small," the order.
In recent years, interest rate reform steadily. Since 1996, has liberalized
interbank market interest rates, bond market interest rates and the inter-bank
bond market, issuance of financial bonds and interest rate policy; the opening of
the domestic foreign currency loans and large amounts of foreign currency
deposit rates; pilot RMB long-term large deposit agreement; gradually expand
the floating range of RMB loan interest rates. In particular, in 2004, the interest
rate market has taken important steps: 1 January again expanded the range of
floating interest rate loans from financial institutions; March 25 floating rate

loans for the implementation of another system; Oct. 29 opening of the

commercial bank lending rates ceiling, urban and rural credit cooperatives
floating rate cap extended to 2.3 times the benchmark rate, the implementation
of the RMB deposit interest rate to float downward system. March 17, 2005, the
PBC announced restructuring of commercial bank loans for self-employed
individual housing policy, the central bank setting interest rates only to the lower
limit of the specific situation of commercial banks can independently determine
the level of interest rates and internal pricing rules.

2, the process of marketization of interest rates in China's commercial banks

face market risk

course of interest rate market is a financial market from the low to high, from
simple form to the complex process of morphological transformation of
commercial banks to meet the opportunities, it also faces many challenges.
Increased interest rate risk, will expand our commercial banking market risk.
Market risk is the result of market prices (interest rates, exchange rates, stock
prices and commodity prices) adverse changes in cal statement and balance
sheet risk of loss business. Market risk exists in the bank's trading and nontrading business. Fluctuations in interest rates caused the market risk of
commercial banks according to different sources can be divided into re-pricing of
risk, yield curve risk, basis risk and options risk.

1. Re-pricing of risk
re-pricing of risk, also known as maturity mismatch risk, is the most important
and most common form of interest rate risk, from bank assets, liabilities, and
balance-sheet business maturity (in terms of a fixed interest rate) or re-pricing
period (the floating rate terms) the difference between the. This re-pricing of
asymmetry within the bank's earnings or economic value will change as interest
rates change. In the analysis of such assets, shall be subject to interest rate
fluctuations on the assets and liabilities are analyzed, namely, interest rate
sensitive assets and interest rate sensitive liabilities for analysis. If the interest
rate sensitive assets than rate sensitive liabilities, the gap was positive, when
interest rates decline, commercial banks, loss of interest; if the interest rate
sensitive assets than rate sensitive liabilities, compared with a negative gap,
when interest rates rise, commercial banks a loss of interest. Gap greater
interest rate risks borne by banks greater. For example, if short-term bank
deposits as long-term source of financing for fixed-rate loan, when interest rates
rise, fixed interest loans, but interest payments on deposits, but will increase as
interest rates rise, so the Bank's future earnings reduction and reduce the
economic value.

present, capital adequacy ratio of commercial banks as lower non-performing

assets do not generate more interest, the structure of assets and liabilities
matching cloth reasonable interest rate sensitive assets and liabilities, the
negative gap between the relatively fixed larger structure of assets and liabilities
the former is not adjusted to better cope with re-pricing of risk status.

2. Yield curve risk

re-pricing will also cause the asymmetry of the yield curve slope, morphological
changes, namely, non-parallel yield curve, on the bank's earnings or a negative
impact on the intrinsic economic value, creating revenue curve risk, also known
as the term structure of interest rate change risks. Slope of the yield curve is that
long-term bond yields higher than short-term bond yields, then there is no yield
curve risk; the slope of the yield curve for the negative long-term bonds that
yield less than short-term bond yields , then a yield curve risk.
Chinese inter-bank bond market by the end of 2004 the yield curve in the 6 ?
years to 13 years between the slope is negative, indicating that China has not
yet expired part of the bond issue to face greater risk of yield curve. According to
China's information network announced the Treasury data show that China's
commercial banks by the end of 2004 held by the State
debt has more than three trillion face value of such a large debt balance in the
case of a negative yield curve, market risk is very large .

3. Basis risk
benchmark interest rate risk, also known as risk based pricing is another
important source of interest rate risk. In the interest income and interest expense
based on the benchmark interest rate movements inconsistency, although the
assets, liabilities, and sheet re-pricing characteristics of business similar to, but
because of the spread cash flow and earnings changes, also on the banks income
or adversely affect the intrinsic economic value. For example, a bank may use
the one-year deposit as a source of financing for one-year loans, loans in
accordance with the re-pricing of U.S. Treasury interest rates once a month, while
the deposits in accordance with the London interbank market interest rate repricing once a month. While one year deposits as the source of payment of oneyear loans, as interest rate sensitive liabilities and interest rate sensitive assets
re-pricing period of existence of same rather than re-price risk, but because of
changes in its benchmark interest rate may not be entirely related the changes
are not synchronized, still make the banks face Yinjizhunli of changes in the rate
of spread basis risk posed.
reform and opening up, China several times to adjust deposit and lending rates,
each of the adjustments in deposit and lending interest rate changes are not
synchronized. To one-year deposit and lending rates (% per annum), for example,

since the 90s of the 20th century, the maximum interest rate of 3.6%, deposit
and lending interest rate is fluctuating flux. After the interest rate market, such
deposit and lending interest rate changes will be more apparent.

4. Option risk
risk option is an increasingly important interest rate risk, from bank assets,
liabilities, and sheet business options implied. Generally, options give the holder
to buy, sell or in some way to change a particular financial instrument or
financial contract, the cash flow rights, not obligations. Options can be a
separate financial instrument, such as the venue (exchange) trading options and
OTC options contracts can also be implicit in other financial instruments being
standardized, such as advance payment bonds or deposits, loan repayment and
other options in advance provisions. In general, options and option terms are
favorable to the buyer and the seller's favor and, therefore, such options tools
due to asymmetric features and give the seller the payment risks. For example, if
the interest rates on depositors or borrowers benefit, the depositors may choose
to re-arrange deposits, the borrower may choose to reschedule loans, which have
a negative impact on banks.
under the relevant provisions of our current commercial bank clients have the
right to withdraw their deposits or to repay the loan ahead of schedule, interest
rate adjusted every time, there will be a lot of advance withdrawal or repayment
of the phenomenon, showing that China's commercial banks are exposed Option
great risk.

3, on the interest rate market in the Market Risk Management of Commercial

Banks Suggestions

1. Foster a strong sense of interest rate risk control

long time, China's commercial banks in risk management, emphasis on the
credit risk of this thesis from www.5udoc.com [worry documentation] to collect
and organize, for the original author! , Policy risk and operational risk, while
market risk caused by interest rate volatility, attention, lack of specialized
internal structures to manage market risk, market risk management awareness is
weak. In the interest rate market, Chinese commercial banks to successfully deal
with market risk, interest rate risk must have a strong sense. Commercial banks
are required to recognize, as the interest rate market step by step, interest rate
risk will become one of its major business risk, interest rate risk will penetrate its
various business activities, and will affect their profit model. Commercial banks
must pay great attention from the operation of conceptual interest rate risk
management, decision-making body set up special interest, from product design,
risk control, all-round implementation of various business sectors interest rate

risk management, to regain the initiative, in the tide of market interest rates
survival and development.

2. Development of financial derivatives market

regulatory authorities may consider learning the advanced experience of foreign
countries, adopting a gradual approach, timely development of the financial
derivatives market to shift in China's commercial banks rally head of market risk.
Such as forward rate agreements, interest rate futures and options, swaps and
swap options, not only enhance the effect of risk diversification, both will not
adversely affect customer relationships. Therefore, the development of
derivatives markets can be effective in promoting China's financial market
system, improve and enhance our overall competitiveness of the financial
industry.

3. To develop intermediary business

business center is the table do not constitute assets of commercial banks, sheet
liabilities, the formation of bank non-interest income business. 90% of China's
commercial banks, business is still the traditional deposit and lending business,
in the interest rate market, the commercial bank's market risk exposure will
increase. Intermediate business of commercial banks in China is still in its
infancy, small business, low income, and foreign banks is very obvious gap.
Intermediary business income of foreign banks has generally accounted for 60%
of the total income is about more than 80%. China's commercial banks should
increase awareness of financial innovation, accelerate the development of
intermediary business, develop new profit growth point to reduce
traditional business dependence decreased interest rate risk.

4. Raise the capital adequacy ratio

bank capital is to determine the strength and capacity to pay their business is
an important factor in the case of interest rate market, the trend is difficult to
predict interest rates, capital adequacy ratio represents the degree of banks to
cope with financial the degree of risks. Therefore, we must as soon as possible,
especially state-owned commercial banks, commercial banks capital to "Basel II"
requirements. Added to the capital of the fastest ways: First issue of
subordinated debt, to add supplementary capital; second is to carry out
shareholding reform, public financing. In short, the bank should be more
channels for raising capital adequacy ratio, enhanced ability to resist risks.

5. To establish a rational pricing system,

market-oriented interest rate commercial banks to enter our country

independent risk pricing of the times, product pricing as a key factor in market
competition. Irrational pricing in the commercial banks will compete in the same
industry at a disadvantage, to establish a scientific and rational pricing
mechanism, the effective allocation of resources, commercial banks compete
urgent need to address the problem. Commercial bank credit from the traditional
pricing model come out, take the initiative to strengthen the riskiness of financial
assets and profitability analysis and research, reasonable pricing and efficient
allocation of assets to lay foundation Chu. Commercial banks should set up
specialized agencies to determine the orientation of each interest rate period,
interest rate policy and the internal funds transfer pricing, the establishment of
efficiency, efficient pricing mechanism for collaboration.

6. Speed up the personnel training

market leading interest rate banks increased competition, commercial banks
must have a close to the market, close to the customer, the market changes and
customer needs analysis with a keen ability to professional teams, to the fierce
competition in the survival and development. Therefore, Chinese commercial
banks must attach great importance to team, and actively introduce and train
financial professionals to enhance their competitiveness and respond to the tide
of marketization of interest rates coming.

7. China Banking Regulatory Commission should strengthen monitoring of

commercial banks, market risk
China Banking Regulatory Commission should be regular commercial bank
market risk management, integrity, efficiency and rationality of conduct
supervision and inspection, found for the supervision of the market risk
management, commercial banking should be submitted within the prescribed
time limit and to take corrective measures rectification program. CBRC
commercial banks can market risk management system modification measures,
including adjusting for market risk measurement methods, models, assumptions
and parameters proposals. Within a specified period of time for not effectively
take rectification measures or market risk management system has serious flaws
of commercial banks, the CBRC shall take strict measures to prevent the
expansion of its market risk and spread.

Reference:
1. Bank of China monetary policy analysis group, and steadily promote marketoriented interest rate reports, 2005,1

2. Tang Lixin, commercial banks should guard against the risk of interest rate
market research, China Economic Review, 2004,7
3. ReneM.Stulz, risk management and derivative products, China Machine Press,
2004,6
4. Zhao Xianxin, bank internal models and regulatory models, Shanghai People's
Publishing House, 2004,6 this paper from www.5udoc.com [worry
documentation] to collect and organize, for the original author! / Center>