BSP orders banks to comply with rate risk management

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is giving banks 18 months to comply with the new guidelines on managing interest rate risk, taking into consideration external shocks such as the US-China trade war and the weakening of the Chinese yuan, among others.

BSP Deputy Governor Chuchi Fonacier said the central bank is giving its supervised institutions enough time to develop or revise their policies and procedures in accordance with the requirements of the interest rate risk in the banking book (IRRBB) guidelines.

Fonacier said banks are given until Jan. 1, 2021 to comply with the new guidelines.

However, Fonacier said banks are required to conduct an analysis of the gaps between these requirements and their existing risk management systems and document the same within six months from the effectivity of the guidelines.

The BSP earlier approved the guidelines on managing the IRRBB for banks to provide clear expectations on how a bank should manage interest rate risk and align the regulator’s supervisory framework on interest rate risk with international standards.

IRRBB refers to the current or prospective risk to capital and earnings arising from adverse movements in interest rates that affect banking book positions.

Banking book positions refer to assets generating interest income such as loans and investments and liabilities paying out interest such as deposits.

Fonacier said IRRBB could manifest through decreased net interest margins for a 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 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.

The key provisions of the guidelines pertain to the expectations on banks regarding IRRBB measurement, which include obtaining a thorough understanding of the frequency of interest rate changes for certain deposits and loans as well as quantifying the possible losses under both normal and stressed business conditions.

The guidelines would also help banks gauge the impact of IRRBB on earnings or capital.

The guidelines also require more detailed disclosures on IRRBB, comprising of information on the banks’ risk management systems and more granular data on their exposures.