The Reserve Bank of India (RBI) on Friday said that banks should put in place measures to protect their balance sheets from excessive movements in interest rates.
Interest rate risk in banking book (IRRBB) refers to the current or future risk to banks’ capital and earnings arising from adverse movements in interest rates that affect its banking book positions and excessive risk can pose a significant risk to their current capital base and future earnings. “These guidelines, accordingly, require banks to measure, monitor, and disclose their exposure to IRRBB,” RBI said.
The RBI has directed the board of the banks to create strategies for dealing with interest rate risks. The board is responsible for ensuring that steps are taken by the bank to identify, measure, monitor and control IRRBB with the approved strategies and policies, the central bank said. Banks should be able to compute the impact of such risks on the economic value and earnings in various scenarios. The RBI has mandated scenarios should be based on internally selected possible interest rate shock according to its internal capital adequacy assessment process and historical and hypothetical interest rate stress scenarios.
Banks should also develop and implement an effective stress testing framework for such risks as part of their broader risk management and governance processes, which should be in line with their nature, size and complexity as well as business activities and overall risk profile. Lenders are responsible for evaluating the level of capital that they should hold, sufficient to cover IRRBB and its related risks, the RBI said.
Separately, the RBI has also issued draft guidelines on minimum capital requirements for market risk as a part of the convergence of banking regulations with Basel III standards. The RBI has sought feedback on the proposed norms by April 15, and said that the final norms will come into effect from April 1, 2024.