Bangladesh Bank guidelines issued for banks’ interest rate risk mitigation

Staff Correspondent | Published: 23:48, Apr 16,2021


The Bangladesh Bank has asked banks to make arrangements for experimental adoption of guidelines on measurement and management of interest rate risk of the banks for the first half of the year 2021.

The central bank gave the instruction on the experimental adaptation of the guidelines as it would become mandatory from June 30, 2024.

Speaking about the reason behind framing the guidelines, the BB said, ‘Effective measurement and management of interest rate risk are crucial for banks in managing liabilities and asset portfolios, which are exposed to risks emanating from adverse movements in interest rates.’

‘The changes in interest rates not only impair the current and potential future earnings but may also potentially threaten the bank’s solvency,’ the BB said.

In order to strengthen interest rate risk monitoring and measurement, the BB developed the guidelines titled ‘Guidelines on Interest Rate Risk in the Banking Book (IRRBB)’ on April 13.

In the BB’s circular issued in this regard on the day, the banks were advised to make adequate and reliable arrangements for the adoption of the guidelines by — developing and formulating IRRBB policy, processes, and procedures, determining the impact of interest rates, both earnings and economic value perspective on the balance sheet structure.

‘The use of suitable statistical tools along with other qualitative and quantitative techniques for measuring interest rate risk is necessary for allocating appropriate capital against the IRRBB,’ the BB circular said.

Besides submission of the half-yearly report of 2021 to the central bank’s offsite supervision department and banking regulations and policy department, the BB also asked the banks to develop their own fully-implementable IRRBB model within the final implementation period of June 30, 2024, the BB said.

‘We believe this guideline is an important key step towards achieving bank-led robust economic growth by strengthening interest rate risk monitoring and measurement,’ BB deputy governor Abu Farah Md Nasser said in his statement in the guidelines.

The country’s banking sector apparently observed the toughest interest rate shock in 2020 as the banks had to implement a 9per cent lending rate from April 1 of the year.

Even though the banks had to implement the rate imposed by the government, the cost of funds was higher than 9 per cent for many banks when the rate was implemented, resulting in a sharp decline in earnings for the banks.

When interest rates change, the present value and timing of future cash flows change, the guidelines said.

‘This in turn changes the underlying value of a bank’s assets, liabilities, and off-balance sheet items and hence, its economic value,’ it said.

The changes in the interest rates also affect a bank’s earnings by altering interest rate-sensitive income and expenses, affecting its net interest income, said the IRRBB guidelines.

Under the guidelines, all the banks were asked to familiarise themselves with all the elements of the IRRBB, actively identify their IRRBB exposures, and take appropriate steps to measure, monitor, and control the risk factors.

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