Responsible Official from the CBRC Answers Questions of the Press on the Implementing of the Guidelines on the Bank Account Interest Rate Risk Management of Commercial Banks

Lately，CBRC issued the Guidelines on the Bank Account Interest Rate Risk Management of Commercial Banks. The responsible official from CBRC answered questions of the press regarding its relevant issues.

Q: What is the background of issuing the Guidelines?

A: After the international financial crisis, the interest rates of international markets fluctuated vigorously, and there were changes in interest rate property of the products of commercial banks’ assets and liabilities. Bank account interest rate risk management is therefore getting increasingly important. In the view of national situation, commercial banks have more and more diversified products, the financial market is getting increasingly mature, and the marketization of national interest rate has made progress stepwise. These result in that the interest rate risk of bank account becomes increasingly obvious, and the sound operation of China’s commercial banks is facing substantial risks. Some large size banks and a small number of joint-stock banks have lately established their market risk management systems. In addition, the industry and the regulatory body currently pay great attention to the interest rate risk of trading accounts with mark-to-market valuation property, and their understanding on the interest rate risk of bank account is still in the early stage. Therefore, there are two main tasks facing China’s commercial banks’ risk management at present:

1.      How can commercial banks maintain a stable profitability under economic fluctuation and the changing environment of interest rates;

2.      The constant supervision, accurate prediction and efficient management of the changing trend of entire profit and economic value.

Q: What is the purpose of drawing up the Guidelines? What is its significance to commercial banks?

A: The Guidelines were drawn up in order to increase commercial banks’ awareness of bank account interest rate risk management, as well as to promote the development of bank account interest rate risk management system. The Guidelines are references for the regulatory body to guide the standardization of bank account interest rate risk management. The Guidelines are of great significance to strengthen commercial banks’ bank account interest rate risk managing ability as follows:

1.      The Guidelines absorb essential elements from 15 principles of the Principles for the Management and Supervision of Interest Rate Risk by the Basel Committee on Banking Supervision, and draw on the operational experiences of the regulatory bodies of the European Union, the United Kingdom and Australia as a source of reference. The Guidelines act as helpful references for commercial banks to set up their own bank account interest rate risk management structure by clearly putting forward requirements on it.

2.      Learning from the common practice and relevant techniques of the international banking industry concerning bank account interest rate risk management, the guidelines provided good examples of bank account interest rate risk management of the international banking industry, which will help guiding bank account interest rate risk management into the right track.

3.      Embodying the risk management requests of bank account interest with the Guidelines will enhance the management and regulation awareness of bank account interest rate risk management of commercial banks and regulatory institutions and also propel the constantly improvement of the level of bank account interest rate risk management of commercial banks.     

Q: What kinds of banks do the Guidelines apply to?

A: the Guidelines apply to all kinds of banks. They do not only apply to the banks that implemented the New Capital Accord. Other banks must also improve and enhance bank account interest rate risk management in accordance with or by reference to the Guidelines, which take into full consideration of the situation of our country and attach great importance to the basic principals of the risk management and regulation of bank account interest rate. In terms of specific provisions, the Guidelines are flexible and adaptable, based on the distinct properties of different institutions. Furthermore, when it comes to measuring the influence of the risk of bank account interest rate, instead of stipulating specific methods, the Guidelines brought up two angles “profit” and “economic value”, and thus providing room for the development of techniques.     

Q: What are the differences and connections between the Guidelines and other policies such as the Market Risk Management Guidelines for Commercial Banks?

A: market risks include interest rate risk, exchange rate risk, stock risk and price risk. The concept of bank account interest rate risk is opposite to that of trading account interest rate risk. It is a kind of interest rate risk. The Market Risk Management Guidelines for Commercial Banks, issued in December 2004, defined the overall management and regulation principals of the above four risks and is a main reference of the Guidelines. Moreover, as a composition of the implementing system of the New Basel, the Guidelines attach great importance to their connection with the policies and regulations already issued and they maintain accordance and coordination with relevant guidelines.

Q: The benchmark deposit and lending rates of the RMB is at present still under the control of the People’s bank of China. Is it necessary for banks to practice risk management of bank account interest rate?

A: There are the following reasons for strengthening bank interest rate risk management:

1.      Although the benchmark deposit and lending rates of the RMB is under the control of the People’s bank of China, there is still structural mismatch within the interest rate re-pricing period of the assets and liabilities of commercial banks. Even if the deposit and lending rates change at the same time with the same margin and the spread between deposit and loan remains stable, there is still a chance that the profit of commercial banks would be adversely affected.  

2.      The interest properties of deposit and lending services of the RMB diversified in recent years. RMB loans of long term fixed interest rate increased, and thus the importance of bank account interest rate risk management has also increased.

3.      The proportion of banking operations that are influenced by the market interest rate have increased, especially that of bonds. Therefore, the influence of market interest rate on banking operations has increased and hence banks should pay more attention to and also strengthen bank account interest rate risk management. 

Q: the Guidelines request inspection on the effects of bank account interest rate risk to “profit” and “economic value”. But there are many difficulties for domestic banks to use the economic value method，so what is the reason for this request?

A: The traditional way of measuring the risk of bank account interest rate according to the changes of profit under the movements of interest rate cannot fully reflect the mid or long term influence of the changes of interest rate on banks. The economic value of the bank account is calculated through predicting the net cash flow and cashing it by using market interest rate. Therefore, compared with profit, the economic value can reflect the risks of interest rate movements better. The Guidelines aim at providing the banking sector and regulatory authorities with a good model of the international banking industry’s risk management and regulation practice. Although it is difficult for banks to achieve some of the requirements at the time being, it is still the developing trend of risk management techniques of bank account interest rate in the long term. At least the banks that have adopted the New Capital Accord and are active on the international market should take the lead in meeting this request. The main reason that the Guidelines raised this principal is for the sake of the future.