The Bangko Sentral ng Pilipinas (BSP) is giving banks more time to submit a transition analysis on the management of interest risk in the banking book (IRRBB) that will include how they will handle stress due to changes in IRRBB exposures.
The circular on IRRBB was approved by the Monetary Board in August of last year as guidelines on banks’ assessment and control of interest rate risks and its effect on its books and core business such as lending and funding. Basically, the IRRBB guidelines is requiring more detailed disclosures or a more granular data on banks’ exposures.
The original deadline is January 1, 2021 but with the pandemic, the central bank issued this week BSP Circular No. 1101 which extended the transition period as part of IRRBB requirements by another year or to January 1, 2022.
The circular, signed by BSP Governor Benjamin E. Diokno on Monday, said banks and quasi-banks will complete a gap analysis as IRRBB requirements “vis-a-vis their existing risk management systems within six months from the effectivity of (the circular)” and that “the results of the gap analysis shall be documented and made available for review by the (BSP).”
The new circular directed banks and quasi banks to “develop or make appropriate changes to their policies and procedures on the management of IRRBB by January 1, 2022” or a year after the original deadline.
The IRRBB, as explained by the BSP, 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 are assets generating interest income such as loans and investments and liabilities paying out interest such as deposits.
The BSP said IRRBB “can manifest through decreased net interest margins for a bank and quasi-bank, which can ultimately impact its capital.” The framework is therefore 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.”
The rules set the minimum requirements on the identification, measurement, monitoring and control of IRRBB. The purpose is for the BSP to obtain a “thorough” understanding of interest rate changes and its frequency for certain deposits and loans, as well as “quantifying the possible losses under both normal and stressed business conditions and gauging the impact of IRRBB on earnings or capital.”
Different types of banks manage IRRBB in various ways but all banks should “measure and assess” the impact of a one, two and three percent movement in interest rates on their net interest income for a 12-month period.
The circular also instructed banks to apply stress scenarios that are specific to their operations and business such as increasing competition within their localities that could result in adjustments in the interest rates that they offer on their loans and deposits, said the BSP.
For complex banks and quasi-banks, the BSP expects thes banks to “come up with a wider range of interest rate shock and stress scenarios against which to measure their IRRBB exposures.”