BSP cautions banks on interest rate risks
The Bangko Sentral ng Pilipinas (BSP) has cautioned banks and financial institutions on interest rate risks on their earnings.
BSP Governor Benjamin Diokno said the Monetary Board has issued resolution 1087 last July 19 approving the adoption of the guidelines for managing interest rate risk in the banking book.
The resolution also amended the guidelines on risk management.
In the circular, Diokno said that the central bank recognizes that changes in the structure of banks’ and quasi bank’s balance sheets and movements in interest rates pose risks to earnings and economic value.
In particular, the BSP chief said excessive interest rate risk in the banking book (IRRBB) may result in a reduction in earnings or of capital.
IRRBB refers to the current or prospective risk to capital and earnings arising from adverse movements in interest rates that affect banking book positions.
“In this regard, the BSP expects banks and quasi banks to implement a comprehensive approach to risk management that ensures timely and effective identification, measurement, monitoring and control of IRRBB,” he said.
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 or quasi bank that can ultimately impact its capital.
Hence, the BSP said the framework is expected to bring about prudent management of the risks posed by movements in interest rates to a bank’s or quasi bank’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 as well as the key provisions of the guidelines pertain to the expectations on banks and quasi banks 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 quasi banks with respect to the management of IRRBB.
The BSP said stand-alone thrift, rural and cooperative banks are expected to measure and assess the impact of a one, two and three percent 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,” it said.