By LEE C. CHIPONGIAN
The Bangko Sentral ng Pilipinas is preparing a new circular dictating how banks should manage liquidity and market risks, especially banks’ vulnerability on interest rates risk.
"These are supervision guidelines on risk management and what are the BSP expectations (before considering) that a bank is properly controlling its liquidity and market risks including interest rates risk," BSP Deputy Governor Nestor A. Espenilla Jr. told reporters over the weekend. He said the guidelines are not strictly Basle2, but more in line with international best practices.
Espenilla said the draft circular would ensure that financial institutions or FIs are clear about their market risks. "The important principle here is to lay down the oversight responsibility internally, within the organization — from the board to management."
The 20-page draft circular is now circulated for comment. It contains guidelines on market risk management to ensure that financial institutions including trust departments have the knowledge and skills necessary to understand and effectively manage market risk.
"(It is what the) BSP expect (from banks) with respect to the management of market risk (to provide) more consistency in how the risk-focused supervision function is applied to this risk. FIs are expected to have an integrated approach to risk management and to identify, measure, monitor and control risks," the proposed circular said.
Market risks include interest rate risk, foreign exchange risk, equity risk and commodity risk.
"The BSP is aware of the increasing diversity of financial products and that industry techniques for measuring and managing market risk are continuously evolving. As such, the guidelines are intended to be for general application; specific application will depend to some extend on the size, complexity and range of activities undertake by individual financial institutions," the central bank said.
The draft however made it clear that the level of market risk assumed by an FI is not necessarily a concern, so long as the FI has the ability to effectively manage the risk.
"BSP will not restrict the level of risk as long as FI understands, measures, monitors and controls the risk assumed. Adopts risk management practices whose sophistication and effectiveness is commensurate to the risk being monitored and controlled and maintains capital commensurate with the risk exposure assumed," the draft explained.
"If the BSP determines that an FI risk exposures are excessive relative to the FI capital, or that the risk assumed is not well managed, the BSP will direct the FI to reduce its exposure and/or strengthen its risk management systems to an appropriate level," the proposed circular said.
In determining the adequacy and effectiveness of an FI’s market risk management process the BSP will consider:
—The major sources of market risk exposure and the complexity and level of risk posed by the assets, liabilities and off-balancesheet activities of the FI
—The FI’s actual and prospective level of market risk in relation to its earnings, capital and risk management systems
—The adequacy and effectiveness of the FI’s risk management practices and strategies as evidenced by:
—The adequacy and effectiveness of the board and senior management oversight
—Management’s knowledge and ability to identify and manage sources of market risk as measured by past and projected financial performance
—The adequacy of internal measurement, monitoring and management information systems
—The adequacy and effectiveness of risk limits and controls that set tolerances on income and capital losses
—The adequacy of the FI’s internal review and audit of its market risk management process.
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