BSP guidelines on managing interest rate risks issued
The Bangko Sentral ng Pilipinas (BSP) has issued the guidelines on how banks should handle interest rate risks and its effect on its books and core business such as lending.
The Monetary Board, BSP’s policy-making arm, has approved the guidelines on managing interest rate risk in the banking book (IRRBB) for banks/quasi-banks, which among others, require more detailed disclosures or a more granular data on their exposures.
With the new guidelines, the central bank is giving banks/ quasi-banks six months from the date of rule effectivity to conduct an analysts of the “gaps” in risk management and that by January 1 in 2021, they should already have a developed or revised policies and procedures under the IRRBB.
The BSP explained that IRRBB is the “current or prospective risk to capital and earnings arising from adverse movements in interest rates that affect banking book positions.” Banking book positions, in the meantime, are 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/quasi-bank, 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/ quasi-bank’s funds generation and lending activities, which are the predominant business activities of BSP-supervised financial institutions,” said the BSP.
Under the new rules, minimum requirements on the identification, measurement, monitoring and control of IRRBB have been set. With regards to IRRBB measurement, the expectations were on: 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.