THE CENTRAL BANK’S policy-setting body Monetary Board laid out additional disclosures required under the Risk-Based Capital Adequacy Framework for the Philippine Banking System on interest rate risk in the banking book (IRRBB) for both lenders and quasi-banks (QBs).
Besides the general disclosure requirement, the Bangko Sentral ng Pilipinas (BSP) has also ordered banks to disclose in their annual report their management and mitigation strategies.
In a memorandum signed by BSP Governor Benjamin E. Diokno, strategies cited include the “monitoring of risk measures in relation to established limits, hedging practices, conduct of stress testing, outcomes analysis, the role of independent audit, the role and practices of the asset and liability committee (ALCO), the bank’s practices to ensure appropriate model validation, and timely updates in response to changing market conditions.”
The central bank said in a statement in August that IRRBB refers to the current or prospective risk to capital and earnings that come from big movements in interest rates that affect banking book positions.
Meanwhile, banking book positions pertain to assets that yield interest income which would include loans and investments and liabilities paying out interest such as deposits.
“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,” the central bank said.
The BSP said it expects stand-alone thrift, rural and cooperative banks to look into the impact of a 1-3% movement in interest rates in relation to their net interest income for the succeeding 12-month period. For their part, big banks and QBs are to come up with a wider scope of interest rate shock and stress scenarios where they will test their IRRB exposures.
Aside from a description of their overall IRRBB management and mitigation strategies, banks are also required to disclose the period of the calculation of their IRRBB measures as well as to describe the interest rate shock and stress scenarios they utilized to estimate the difference in the earnings.
The BSP also said banks should present a “high level description of key modelling and parametric assumptions used in IRRBB measurement” as part of their disclosure. — L.W.T. Noble