A study on interest rate risk management and its effects on capitalization and profitability of selected commercial banks in the Philippines for the period 1995 to 2004

• Main Authors: Lubag, Krystel, Seo, Youri, Tomampoc, Orladel Berdiomil
• Format: text
• Language: English
• Published: Animo Repository 2005
• Subjects: Banks and banking > Philippines; Interest rate risk > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/18491
• Institution: De La Salle University

Interest rate risk is one of the most important forms of risk that banks face in their role as financial intermediaries, where a banks' income or net worth could be adversely affected by unanticipated changes in interest rates. Accordingly, the use of derivatives has been increasing in the area of interest rate risk (IRR) management, specifically so that commercial banks may hold lesser expensive capital and at the same time increase their profits. This paper is a descriptive study ont he interest rate risk management especially, its effects on capitalization and profitability of selected commercial banks in the Philippines for the period 1995 to 2004. Qualitative and quantitative approaches were used to describe the interest rate risk management practices and to determine the effects of interest rate risk management on capital and profitability of the selected commercial banks in the Philippines for the period 1995 to 2004. The qualitative approach describes the interest rate risk management of selected commercial banks in the Philippines in terms of the role of the board of directors and senior management, policies and procedures, measurement, and reporting and control. In IRR management, the key role of the board of the directors and the senior management is to determine the risk appetites of their institutions and to ensure that appropriate policies and procedures are established. The policies and procedures are consistent with the institution's appetite for interest rate risk as well as the institution's strategies, financial condition, interest rate risk management systems. In addition, various methods are used by selected commercial banks in measuring interst rate risks, of which, the most common are VaR and stress simulations. The main difference in the reporting and control of local and foreign commercial banks is that local banks report to the board of directors and senior management on a monthly basis while foreign banks do so daily. The quantitative approach was undertaken through the application of linear regression and cross-sectional time series analysis. The results of the linear regression have proved that there is a positive relationship between the 5% national values of financial derivatives and VaR, for the period 1995 to 2004. The test for cointegration and causality were apllied, to further support that financial derivatives affect capitalization, net interest margin and return on assets, signifying the presence of a unilateral relationship. Lastly, panel data analysis was used to confirm the efficient estimation of the parameters and the correct specification of the model. The results confirmed that financial derivatives significantly affect capitalization, net interest margin and return on assets of selected commercial banks int he Philippines. The qualitative and quantitative approaches of this study have shown that interest rate risk management affects capitalization and profitability of selected commercial banks in the Philippines for the period 1995 to 2004, where, commercial banks that use financial derivatives for interest rate risk management hold lower levels of expensive capital while earning higher profits. This leads to the implication that derivative usage allows commercial banks to substitute interest rate risk management for capital and provide additional alternatives to earn higher profits.