BSP extends bank rate risk analysis until January 2022

Bangko Sentral ng Pilipinas (BSP) is giving banks more time to present a transition analysis on managing interest risk in the banking portfolio (IRRBB) which will include how they will manage stress due to changes in IRRBB exposures.

The circular on IRRBB was approved by the Monetary Board in August last year as guidelines on the assessment and control of interest rate risks by banks and their effect on their books and core businesses, such as loans and financing. Basically, the IRRBB guidelines require more detailed disclosures or more granular data on bank exposures.

The original deadline is January 1, 2021, but with the pandemic, the central bank this week issued BSP Circular No. 1101 which extended the transition period as part of the IRRBB requirements for another year or until January 1. January 2022.

The circular, signed by BSP Governor Benjamin E. Diokno on Monday, said that banks and quasi-banks will complete a gap analysis as IRRBB requirements “in relation to their existing risk management systems within six months of the validity of (the circular) ”And that“ the results of the gap analysis will be documented and will be 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 the IRRBB before January 1, 2022” or one year after the original deadline.

The IRRBB, as the BSP explains, is the “current or future risk to capital and earnings arising from adverse movements in interest rates that affect bank portfolio positions.” Bank book positions are assets that earn interest income, such as loans and investments, and liabilities that pay interest, such as deposits.

The BSP said that the IRRBB “can manifest itself through a decrease in net interest margins for a bank and quasi-bank, which can ultimately affect its capital.” Therefore, the framework is expected to “achieve prudent management of the risks posed by movements in interest rates for a bank / quasi-bank’s loan and fund-generating activities, which are the predominant business activities of institutions. supervised by BSP “.

The rules establish the minimum requirements on the identification, measurement, monitoring and control of IRRBB. The purpose is for the BSP to obtain a “complete” understanding of interest rate changes and their frequency for certain deposits and loans, as well as to “quantify possible losses under normal and stressed business conditions and measure the impact of IRRBB on profit or capital. “

Different types of banks administer the IRRBB in different ways, but all banks must “measure and evaluate” the impact of a one, two, and three percent movement in interest rates on their net interest income over a period of time. 12 months.

The circular also instructed banks to apply stress scenarios that are specific to their operations and businesses, such as increased competition within their localities that could result in adjustments in the interest rates they offer on their loans and deposits, the BSP said. .

For complex banks and quasi-banks, the BSP expects these banks to “present a broader range of interest rate shock and stress scenarios against which to measure their exposures to IRRBB.”