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
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.