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India's central bank proposes measures to manage interest rate risks in banks

The Reserve Bank of India proposed a set of measures for banks to manage risks associated with adverse movements in interest rates.

The central bank said Feb. 2 that excessive interest rate risk in banking book, or IRRBB, can bring a significant threat to a bank's current capital base and future earnings if not managed appropriately.

Under the proposed guidelines, the central bank may require banks to hold additional capital against IRRBB if their level of interest rate risk generates a drop in market value of equity of more than 20% with interest rate shock of 200 basis points. Banks with exposure equivalent to less than a 20% drop in the market value of equity may also have to hold additional capital if the central bank considers the level of interest rate risk to be high in relation to their capital level.

In addition, the central bank said banks will need to develop and implement an effective stress testing framework for IRRBB and will be required to measure their vulnerability to loss under stressful market conditions.

The regulator also advised banks to identify risks associated with the changing interest rates on its on-balance sheet and off-balance sheet exposures in the banking book from both short-term and long-term perspectives.

The proposed guidelines are open for comments until March 3 and will take effect April 1, 2019, if approved.