RBI proposes a new set of risk measure norms for banks
MUMBAI: The Reserve Bank of India has proposed a new set of risk measurement norms for banks in a draft paper which could probably raise the capital needs of the lenders. In a draft proposal, the central bank has said that banks should compute the potential risk of value erosion on overall banking operations.
"Interest Rate Risk In Banking Book (IRRBB) is a material source of risk to the banks in the long run, it is considered desirable to enhance the requirements applicable to IRRBB," the central bank said in a draft proposal put on its website.
Central bank vigilance is being enhanced to monitor risk at the global level with the development of guidelines by the Bank for International Settlements which is popularly known as Basel guidelines. While interest rate risk has been measured for capital allocation, it was being done without an internationally accepted standard.
Interest rate movements affect banks profits, net interest income, and almost every financial parameter. The impact of it could be on the trading books, loans portfolio, deposits and their other assets.
Now, Indian banks compute Equity Value Erosion and impact of interest rate movement on their Net Interest Income, for the entire balance sheet and not just for the banking book positions. However, in order to move towards global standards, banks have to split the risk from rate movements into loans, deposits and trading book in one.
``While banks may on their own decide to hold additional capital towards IRRBB keeping in view the potential drop in their market value of equity,’’ the RBI may intervene if necessary, says the proposal.
"Interest Rate Risk In Banking Book (IRRBB) is a material source of risk to the banks in the long run, it is considered desirable to enhance the requirements applicable to IRRBB," the central bank said in a draft proposal put on its website.
Central bank vigilance is being enhanced to monitor risk at the global level with the development of guidelines by the Bank for International Settlements which is popularly known as Basel guidelines. While interest rate risk has been measured for capital allocation, it was being done without an internationally accepted standard.
Interest rate movements affect banks profits, net interest income, and almost every financial parameter. The impact of it could be on the trading books, loans portfolio, deposits and their other assets.
Now, Indian banks compute Equity Value Erosion and impact of interest rate movement on their Net Interest Income, for the entire balance sheet and not just for the banking book positions. However, in order to move towards global standards, banks have to split the risk from rate movements into loans, deposits and trading book in one.
``While banks may on their own decide to hold additional capital towards IRRBB keeping in view the potential drop in their market value of equity,’’ the RBI may intervene if necessary, says the proposal.
