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The recognition and avoidance of the bond interest rate risk and market risk

Author: ZouHongYuan From: www.yourpaper.net Posted: 2009-03-31 18:23:25 Read:
Since the end of 2003 and the first half of 2004, due to expected increases in interest rates, the rise in oil and commodity prices brought down prices in all of government bonds in the exchange market, so banks and other financial institutions, and large enterprises to participate in the national debt transactions suffered a large loss. This is the first emergence of China Banking risk government bonds due to holders of government bonds positions. January 4, 2007, the People's Bank of China launched the Shanghai Interbank Offered Rate, the launch of this interest rate means that China's banking sector holders of government bonds, the risk of trading government bonds will further expand. Since then, domestic financial institutions and scholars gradually began to realize that the management the importance of risk due to fluctuations in interest rates to the national debt, and this the risk collectively referred to as interest rate risk. In fact, however, the risk of fluctuations in interest rates to the national debt are collectively referred to as interest rate risk is not appropriate. Holders of government bonds due to an incorrect understanding of the risk of fluctuations in interest rates bonds will not help the unified management of China's banking sector to the government bond risk, and even lead to more losses.

First, interest rate risk and market risk [1] [2]

(A) Interest rate risk generated
Interest rate risk is the objective existence of a financial phenomenon. It is a bank or non-bank financial institutions engaged in the assets of the business and liabilities of the business activities, suffered as a result of changes in market interest rates decline in net income level, net worth (assets - liabilities) reduce the loss of possibility. The U.S. banking industry in the 1980s precisely because not fully aware of the existence of the interest rate risk, and when the unexpected rise in interest rates, a large number of financial institutions have suffered economic solvency, or even bankruptcy. Although the changes in interest rates is not expected is the direct cause of a large number of bank insolvency, but the reasons for the interest rate risk or banks exposed to interest rate risk, but not a change in interest rates. To illustrate this problem, we first assume that banks make such a basic deposit and loan business: absorb a sum of an annual interest rate of 10% of the biennium, deposits, payment of a per annum for a 12 year loan. Can be seen in the two-year deposit and loan period, even if market interest rates change, the bank is also able to obtain a 2% interest rate returns, because the interest rate is the deposit and loan agreements signed in the banks and their customers in the form of the contract fixed. Therefore, changes in interest rates is not the interest rate risk exposure to the root causes. So if we assume that the bank deposit and loan business to change to absorb a sum of one-year deposit interest rate of 10%, the payment of a interest rate of 12% year loan. The interest rates for deposits and loans in the first year, due to the beginning of the signing of the loan agreement have been identified, even if interest rates are constantly changing, the banks are also able to obtain stable spreads gains. But when the deposit matures, one year after the new deposits to support the unexpired loan, if market interest rates rise, under the same conditions in the lending rates, bank spreads receipts will decline, on the contrary If market interest rates decline, the bank will reduce interest costs, will get more spread income. Thus it can be seen that the rise in interest rates would not necessarily result in the reduction or loss of the profitability of the banking sector, and it is because the interest rate risk on bank deposits and term of the loan does not match .

(B) generation of market risk defined
Market risk is the risk that only appeared in recent years, a new term. The reason why the market risk because financial institutions are actively involved in the sale and purchase of assets or liabilities of the business being them the purpose of the transaction is intended to buy low and sell high earning capital gains rather than as a long-term investment, financing and hedging the purpose of preserving and increasing. In recent years, due to the frequent trading activities of financial institutions, while many of the world's major financial institutions are trading in the loss of a lot of profit, regulatory authorities, as well as financial institutions, analysts began to more and more attention to the activities of this nature. Especially since the 1990s, at the same time as the market becomes more and more complex due to the shrinking of the traditional commercial banking and investment banking, large financial institutions are trying to earn more profits from trading activities (For example, the stock and bond markets of emerging market countries, and the new complex financial derivatives contracts), so this is growing due to participate in the risks in market transactions.

(C) the comparison of market risk and interest rate risk
To accurately distinguish between interest rate risk and market risk, begin the conceptual distinction between financial institutions, investment portfolio and the trading portfolio, both in time and mobility is inconsistent. The trading portfolio includes a quickly organized market to buy or sell assets, liabilities and derivatives contracts; investment portfolio, including relatively illiquid assets, liabilities, banks will be in a longer period of time hold them. Records of the bank's balance sheet assets from an accounting point of view can be divided into two broad categories of banking accounts and trading accounts. Basel Committee of the New Basel Capital Accord "of 2004 of its 1996" Basel II market risk Supplementary Provisions trading account definition changes, the revised definition: trading account records to the bank for trading purposes or circumvent the transaction account other project risks held freely tradable financial instruments (primarily including debt, foreign exchange, equities, etc.) and commodity positions , holds them in order from the actual or anticipated short-term fluctuations in profit. And corresponding trading account, the bank's other businesses included in the bank account, the most typical deposit and loan business. The items in the trading account is usually denominated at market prices, when the lack of reference to the market price, you can model pricing. Banking account is usually denominated in terms of historical cost.

Second, the China Banking treasury bonds risk analysis of [3]

As mentioned earlier, since the end of 2003 and the first half of 2004, due to expected increases in interest rates brought about by the rise in oil and commodity prices, bond prices fell, which is a comprehensive China's banking sector due to holders of government bonds positions Debt Risks highlights for the first time. Accompanied by hikes in October 30, 2004, the People's Bank of China, the national debt risks, the unique financial risks faced by China's banking sector has become a hot topic of attention. According to the author of the analysis, the China Banking Treasury risk before and after the rate hike were showing the different characteristics of the market risk and interest rate risk.

(A) to raise interest rates before the performance - in the form of market risk
In the 1990s, China's banking industry is facing huge credit risk, which is mainly due to the closure of state-owned enterprises and collective enterprises, reorganization, restructuring, as well as part of the enterprise is the lack of credit and other reasons, making it difficult for banks to recover loans. Buy large amounts of government bonds in the subsequent late 1990s to the early 2000s, the bank in order to avoid the credit risk, the steering The Treasury bonds gradually become a bank is a safe, stable source of profits. However, Treasury prices fell in late 2003 and the first half of 2004, made the Banking aware of the existence of the national debt risk, Treasuries bring stability to the bank interest income while also trading process generated a lot of losses. From an accounting point of view, the bank as long as able to hold these bonds to maturity, the bank carrying amount does not produce loss. But banks usually need to hold some government bonds, especially short-term government bonds as secondary reserves to meet liquidity needs, banks for liquidity needs have to be realized in the inter-bank bond market bonds, inevitably will suffer a decline in bond prices the losses caused by this loss will be immediately reflected in the financial statements of the bank. On the other hand, the attitude of the Bank of China on the speculative behavior compared with other large banks in the world in terms of relatively more cautious, but Chinese banks will profit by trading to increase the profits of the bank. In this way, the end of 2003 and the first half of 2004, bond prices fell on China's banking sector as a whole suffered tens of billions in government bonds trading loss. This loss is directly reflected in the form of market risk.

(B) to raise interest rates after the performance - mainly for the interest rate risk in the form of
October 30, 2004, the People's Bank of China officially announced to raise the benchmark interest rate, the 1-year time deposit rate increased to 2.25% from 1.98%, while the one-year lending rate increased to 5.58% from 5.31%. Held investment as the main purpose of the bonds so that banks will inevitably face economic losses brought about by the rise in interest rates. Before and after the rate hike, although the decline in the price of government bonds, in accordance with the provisions of the current financial enterprise accounting standards relating to the treatment of long-term bond investments, the bank actually made the difference between the value of the proceeds received and the carrying amount of the investment, as profit or loss. As long as the banks have been holding these bonds until maturity, the bank can get the entire period in the national debt stable interest income. At this point the risk where embodied? In fact, here the risk we mentioned in the first part of the interest rate risk is the same. Because from the point of view of finance, loans and government bonds are the same kind of assets, namely fixed-income securities, loans and deposits deadline or duration does not match the interest rate risk arising from the same applies to the assets of such a bond. Financial institutions every year bonds have to calculate the interest rate specified by the coupon interest income, regardless of how the current market interest rate change, the gains are unchanged. Therefore, when market interest rates increase, the national debt held by the banks to raise interest rates before the end of the year will get the same rate hike before interest income, and major funds to support the banks to buy government bonds still deposit, because usually investment the duration of bonds should be longer than the deposit period, therefore raise interest rates once the deposit matures banks need to pay more interest to get the funds to buy government bonds, the interest of the bank next year unchanged, but the deposits rising interest costs, the bank's net interest income decreased to the loss of interest in China's banking system, according to our estimates of interest rates rose to 19.887 billion yuan,
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