Stress test re­veals banks’ de­riv­a­tives port­fo­lio at high risk of MTM losses

STRESS TESTS ON DE­RIV­A­TIVES PORT­FO­LIOS WERE CON­DUCTED FOR A SAM­PLE OF 24 SE­LECT BANKS WITH THE REF­ER­ENCE DATE AS SEPT 30, 2013, AND THE BANKS IN THE SAM­PLE RE­PORTED THE RE­SULTS OF FOUR SEP­A­RATE SHOCKS ON IN­TER­EST AND FOREX RATES. THE SHOCKS ON THE IN­TERES

The Financial Express - - MONEY & MARKETS - Fe Bureau

Mum­bai, Dec 30: Stress tests on In­dian banks’ de­riv­a­tives port­fo­lio re­veal that they are at a high risk of mark-tomar­ket losses, the RBI’s Fi­nan­cial Sta­bil­ity Re­port said on Mon­day.

“The re­sults showed that the av­er­age net im­pact of in­ter­est rate shocks on sam­ple banks was not high. How­ever, the for­eign ex­change shock sce­nar­ios showed rel­a­tively large im­pact in Septem­ber 2013 po­si­tion due to the de­pre­ci­ated ru­pee rate pre­vail­ing at that time,” the RBI re­port said.

Stress tests on de­riv­a­tives port­fo­lios were con­ducted for a sam­ple of 24 se­lect banks with the ref­er­ence date as Septem­ber 30, 2013, and the banks in the sam­ple re­ported the re­sults of four sep­a­rate shocks on in­ter­est and for­eign ex­change rates.

The shocks on the in­ter­est rates ranged from 100 to 250 ba­sis points, while 20% ap­pre­ci­a­tion or de­pre­ci­a­tion shocks were as­sumed for for- eign ex­change.

De­riv­a­tives are fi­nan­cial in­stru­ments used to hedge risks or for spec­u­la­tion. They’re de­rived from stocks, bonds, loans, cur­ren­cies and com­modi­ties, or linked to spe­cific events like changes in the weather or in­ter­est rates.

The ru­pee had de­pre­ci­ated sharply to R68 against the dol­lar to record lows against in Au­gust. In 2011, the RBI had fined 19 banks for vi­o­lat­ing guide­lines on de­riv­a­tives.

Th­ese in­cluded the coun­try’s top pri­vate sec­tor and for­eign banks and the RBI said that the of­fences in­cluded sell­ing un­suit­able prod­ucts to cor­po­rates, sell­ing prod­ucts with­out ver­i­fy­ing the un­der­ly­ing ex­po­sure and sell­ing de­riv­a­tives to com­pa­nies that do not have risk-man­age­ment prac­tices in place.

The apex bank’s re­port added that though the de­riv­a­tive port­fo­lio size in banks has shrunk since 2008, it still re­mains large with the out­stand­ing no­tional prin­ci­pal con­sti­tut­ing over 130% of banks’ to­tal as­sets as on Septem­ber 30 with for­eign banks as a group ac­count for about 62% of the out­stand­ing no­tional prin­ci­pal in the de­riv­a­tives mar­ket.

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