SARB proposes stricter oversight for bank interest rate risk
The South African Reserve Bank (SARB) has issued a proposed directive to revise requirements for interest rate risk in the banking book (IRRBB). The directive aims to enhance the measurement and management of banks' exposure to interest rate changes.
Measuring the repricing gap
The South African Reserve Bank's (SARB) proposed directive revises requirements for the monthly form BA 330, focusing on interest rate risk in the banking book (IRRBB).
This return aims to determine the repricing gap between a bank's assets and liabilities, both before and after derivative impacts.
It also assesses the expected cumulative impact on net interest income (NII) from specified interest rate changes and the expected change in economic value of equity (EVE) under various interest rate shock and stress scenarios.
All relevant information must be reported in rand and calculated on an accrual basis, based on nominal, notional amounts, or fair value.
Banks must include all on- and off-balance sheet items that affect interest rate risk exposure, encompassing interest-bearing assets and liabilities, discounted securities, zero-coupon bonds, and variable-rate instruments like call deposits or Jibar/ZARONIA-linked products, reported by their next known reset date.
Fixed-rate instruments are to be reported based on their residual maturity.
Discretionary rate instruments, such as savings accounts, are included based on their earliest adjustable interest-rate date.
Derivative instruments sensitive to interest rate changes are also mandatory.
These requirements apply to all banks and controlling companies on both a solo and consolidated basis, ensuring comprehensive coverage of IRRBB exposures.
Board's role in risk governance
The directive outlines extensive requirements for a bank's governance and risk management framework concerning IRRBB.
Boards of directors must specify and oversee the bank's risk appetite for IRRBB exposure, covering both economic value (change in net present value) and earnings (impact on future profitability).
This includes setting appropriate limits and sub-limits that apply on a solo and consolidated basis, considering the bank's nature, size, and complexity.
These limits must also account for risks from currency mismatches and accounting treatment.
Boards are required to approve the bank's broad business strategy, risk appetite framework, and all major hedging initiatives.
They must also ensure robust risk management frameworks, systems, and internal controls are in place, including effective validation frameworks and adequate policies for valuation and performance assessment.
Regular, independent reviews of these frameworks are mandatory, with findings reported directly to the board or its delegated committee.
Sharpening the supervisory lens
This proposed directive marks a significant step towards more granular and robust oversight of interest rate risk in South African banks.
The comprehensive reporting and governance mandates signal SARB's proactive alignment with international best practices to enhance financial stability.
While increasing compliance, these measures are crucial for ensuring banks are adequately prepared for potential interest rate volatility.