What is basis risk?

Benchmark risk, also known as the basic risk of interest rate pricing, is another important source of interest rate risk. In the case of inconsistent changes in the benchmark interest rate on which interest income and interest expenses are based, although the repricing characteristics of assets, liabilities and off-balance-sheet businesses are similar, the difference between their cash flow and income has changed, which will also adversely affect the income or internal economic value of banks.

Interest rate risk refers to the possibility that the uncertainty of market interest rate changes will cause losses to commercial banks. In the Principles of Interest Rate Risk Management issued by Basel Committee 1997, interest rate risk is defined as the possibility that the actual income of commercial banks deviates from the expected income or the actual cost deviates from the expected cost, so that the actual income is lower than the expected income or the actual cost is higher than the expected cost, thus causing commercial banks to suffer losses. Refers to the risk that the price of financial instruments originally invested in fixed interest rates may fall when the market interest rate rises. Financial instruments to avoid interest rate risk include floating certificates of deposit, futures, interest rate options, interest rate exchange rate and interest rate ceiling.

Interest rate risk is one of the main financial risks of banks. Because there are many factors that affect interest rate changes, it is difficult to predict interest rate changes. One of the key points in daily management of banks is how to control interest rate risk. The management of interest rate risk depends to a great extent on the management of banks' own deposit structure and the use of some new financial instruments to avoid risks or try to benefit from them.

Risk management is one of the core contents of modern commercial bank management. With the advancement of interest rate marketization, interest rate risk will also become one of the most important risks faced by commercial banks in China. The interest rate risk management of western commercial banks has been relatively mature after long-term development. However, the long-term interest rate control has led to the insensitivity of China commercial banks to interest rate changes, insufficient understanding of interest rate risks and relatively backward interest rate risk management.

Therefore, how to prevent and resolve interest rate risk and effectively manage interest rate risk has become an urgent and important problem for commercial banks. Interest rate risk and its classification The Basel Committee on Banking Supervision divides interest rate risk into four categories: repricing risk, basis risk, yield curve risk and option risk.

repricing risk

Repricing risk is the most important interest rate risk, which stems from the mismatch between repricing time (for floating interest rate) and maturity date (for fixed interest rate) of bank assets, liabilities and off-balance sheet project positions.