BSP Strengthens Framework for Managing Interest Rate Risk in the Banking Book.
ENPNewswire-August 14, 2019--BSP Strengthens Framework for Managing Interest Rate Risk in the Banking Book
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Release date- 13082019 - The Monetary Board approved the guidelines on managing interest rate risk in the banking book (IRRBB) for banks/quasi-banks (QBs).
IRRBB refers to the current or prospective risk to capital and earnings arising from adverse movements in interest rates that affect banking book positions. The guidelines aim to provide clear expectations on how a bank/QB should manage IRRBB and align the BSP's supervisory framework on interest rate risk with international standards.
Banking book positions refer to assets generating interest income such as loans and investments and liabilities paying out interest such as deposits. IRRBB can manifest through decreased net interest margins for a bank/QB, which can ultimately impact its capital. Hence, the framework is expected to bring about prudent management of the risks posed by movements in interest rates to a bank's/QB's funds generation and lending activities, which are the predominant business activities of BSP-supervised financial institutions.
The new guidelines set out the minimum requirements on the identification, measurement, monitoring and control of IRRBB. The key provisions of the guidelines pertain to the expectations on banks/QBs regarding IRRBB measurement, which include obtaining a thorough understanding of the frequency of interest rate changes for certain deposits and loans; quantifying the possible losses under both normal and stressed business conditions; and gauging the impact of IRRBB on earnings or capital.
In developing the guidelines, the BSP likewise took into consideration the profiles and existing practices of banks and QBs with respect to the management of IRRBB. Stand-alone thrift, rural and cooperative banks are expected to measure and assess the impact of a 1%, 2% and 3% movement in interest rates on their net interest income for the succeeding 12-month period. These banks should likewise apply stress scenarios specific to them, such as increasing competition within their localities that could result in adjustments in the interest rates that they offer on their loans and deposits. Meanwhile, complex banks/QBs are expected to come up with a wider range of interest rate shock and stress scenarios against which to measure their IRRBB exposures.
The guidelines also require more detailed disclosures on IRRBB, comprising of information on the banks' risk management systems and more granular data on their exposures.
Covered supervised institutions are given until 1 January 2021 to develop or revise their policies and procedures in accordance with the requirements of the IRRBB guidelines. However, banks/QBs need to conduct an analysis of the gaps between these requirements and their existing risk management systems and document the same within six (6) months from the effectivity of the guidelines.
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|Date:||Aug 14, 2019|
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