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11.09.2008

Regulation on managing interest rate risk, approved by DCA of the NBM no. 249 of September 22, 1999

Note: The translation is unofficial, for information purpose only

Published in the Official Monitor of the Republic of Moldova no. 109-111/192 of 07.10.99

Approved by Decision No. 249 of the
Administrative Council, National Bank of Moldova
Minutes No. 48, dated September 22, 1999

REGULATION
on managing interest rate risk

Amended by:

DCA of the NBM, no.299 of 15.11.2001, Official Monitor of the Republic of Moldova no. 141-143 of 22.10.2001
DCA of the NBM, no.171 of 11.09.2008, Official Monitor of the Republic of Moldova no. 180-181 of 3.10.2008

I. AUTHORITY

  1. This Regulation is developed pursuant to the authority vested in the National Bank of Moldova by Articles 11, 44 and 46 of the Law on the National Bank of Moldova and Articles 28, 29 and 53 of the Law on Financial Institutions.

II. APPLICATION

  1. This Regulation shall apply to all banks licensed by the National Bank of Moldova.

  2. An efficient assets and liabilities management is essential in managing risks of a bank. Assets and Liabilities Management includes the control of interest rate risk, maturity risks and liquidity risk. This regulation shall be applied in concert with other standard acts of the National Bank of Moldova at the asset and liability management instruction and implementation.

 

III. DEFINITIONS

For the purpose of this regulation the following definitions shall be applied:

  1. Assets and liabilities management – managing process of bank’s assets and liabilities structure (including the maturity terms and establishment of new interest rates). The purpose of assets and liabilities management is:
    4.1. To obtain a stable net related to interest income and optimize bank’s profit, at the same time maintaining the total regulatory capital;
    4.2. To control the bank’s interest rate level and maturity risk level;
    4.3. To maintain an adequate liquidity.

  1. Maturity difference analysis a sole interest rate risk evaluation and management system. Analysis of maturity differences determines the risk of net related to interest income. Reports on differences analysis show the sum of sensible to interest rate assets and liabilities of a bank (balance sheet accounts and off-balance sheet accounts) which value will be reestablished within a determined period of time. To establish the risk value of bank’s profit, it is necessary within each period to withdraw from sensible to interest rate assets the sensible to interest rate liabilities in order to obtain the “difference” of the new values establishment for that period. This difference shall be multiplied to a supposed change in interest rates to obtain an approximate change in net income related to the interest, which is a consequence of change in the interest rate. When liabilities surpass assets in a certain period of time, a positive difference is obtained, which means that a growth of interest rates on the market could lead to a reduction of the net income related to interest rate.

  2. Interest rate risk – the risk of incurring losses by a bank as a result of interest rate changing. This risk shows up when the bank’s assets (credits, investments, etc.) come to maturity or their new prices are established in a different period of time than the prices of the liabilities (deposits, loans), which are the source of means for assets. The interest rate fluctuations may influence the bank’s profit, the primary economic value of assets, liabilities and off-balance positions.

  3. Liquidity risk – the risk of incurring losses by a bank as a result of its inability to satisfy its need for cash or as a result of insufficient liquidity that must be recuperated at an excessive cost.

  4. Maturity risk – the risk of incurring losses by a bank as result of non-corresponding maturity terms of its assets and liabilities. The non-correspondence of maturity terms of bank’s assets and liabilities may cause new losses to those caused by the interest rate risk.

  5. Risk handling – a system of identification, assessment, supervision and control of different risks incurred by a bank. Despite the fact that a bank incurs a lot of risks, including credit risk and fraud, assets and liabilities management provides in the first place the control of interest rate, maturity risk and liquidity risk.

 

IV. REQUIREMENTS REGARDING THE MANAGEMENT OF INTEREST RATE RISK

  1. Because of existent differences among banks (organizational chart, financial activities, etc.), each bank shall develop its policy on management of interest rate risk according to its individual conditions. In order to insure an efficient management of interest rate risk, the policy must include fundamental elements as the bank’s council and the executive function’s appropriate supervision, as well as a complex process of risk management, which establishes, evaluates and supervises the risk in an efficient way. In the purpose of this Regulation, the National Bank establishes the following minimum requirements that banks shall comply with when developing the policy on managing interest rate risk.

  2. The bank’s policy shall be approved by the bank’s council and promoted by the executive power, the policy shall include, but not be limited to, the following:
    11.1. Responsibility of members of the executive power delimited for managing interest rate risk.
    Banks, which assets exceed 50 mil. lei shall create a committee on assets and liabilities management. This committee, formed by members of the executive power and managers of independent subdivisions, is going to develop and submit to the bank’s council for approval the draft policy on managing interest rate risk, combined management of interest rate risk, liquidity risk, maturity risk and compliance by the bank with provisions of standard acts in the field and the control on implementing the named policy;
    (As amended on November 15, 2001, Decision no. 299)
    11.2. Instructions on the level of interest rate risk accepted by the bank, including limits on the interest rate risk for assets, liabilities and off-balance accounts.
    When establishing limits on the interest rate risk the banks shall take into account the bank’s capital amount, profit, liquidity, clients’ structure, the volume and diversity of activities. These limits shall apply to the total risk incurred by the bank;
    11.3. The establishment of bank’s sufficient resources (including technical and human resources) for managing of interest rate risk;
    11.4. A system for establishing, evaluating and supervising the interest rate risk shall be established. The objective of this system is to insure the maintenance of interest rate risk at the level established by the council.
    The bank must create an appropriate system of information, which will insure the obtaining of authentic, complete and opportune information by the committee on assets and liabilities management in order to accomplish its obligations in compliance with this Regulation;
    11.5. The identification of types of instruments and activities, which shall be used in managing bank’s exposure to interest rate risk. Allowed instruments shall be concretely established according to their characteristics and purposes of their use;
    11.6. Authorization procedures of exceptions to the banks policy;
    11.7. Internal appropriate controls and provisions included in the internal audit program of the bank shall be conducted in order to insure the integrity of the management process of the bank’s general risk, including interest rate risk;
    11.8. Periodical policy reexamination by the bank’s council at least once a year. Such a reexamination shall determine whether the established limits on bank’s exposure to the interest rate risk correspond to the current situation, taking into account the amount of the total regulatory capital;
    11.9. Internal reports – regular periodical reports (at least quarterly or more frequently) that reflect the bank’s exposure to the interest rate risk are to be submitted to the council, executive power and/or to the committee on assets and liabilities management.
    These reports shall include at least the following:
    (1) The level and tendency of interest rate risk incurred by a bank. The report must include an analysis of maturity differences. Banks can elaborate and use more sophisticated systems and reports on management of interest rate risk (e.g. gap analysis or modeling). Any system that will be used shall include all the essential positions of the interest rate in a bank, all the necessary information on the reevaluation and maturity, as well as suppositions and documentary methodologies;
    (2) The acceptable character of the key principles used at establishing the interest rate risk and in the supervision system, which insures the fact that during analysis the “worst case” variants will be used;
    (3) Obeisance of risk limits established by the bank’s council, including all the exceptions to the council’s policy;
    (4) Determination of the necessary amount of the total regulatory capital for the interest rate risk level incurred by a bank;

 

V. REPORTING

  1. Banks shall submit quarterly to the National Bank of Moldova the report on the analysis of maturity differences, in compliance with the Instruction of the National Bank of Moldova on the method of elaboration and submission of financial reports by banks.

  2. The first report should be submitted as of December 31, 1999.

 

VI. CORRECTING MEASURES

  1. Banks that have been determined to have a high level of exposure to the interest rate risk and/or banks that have inadequate methods of risk management will have to take necessary remedial measures. These remedial measures shall include requirements to augment the total regulatory capital, to improve management knowledge, to improve the informational and evaluation systems, to reduce the risk exposure level, or a combination of these measures in relation to the situation and conditions in each bank.

 

VII. FINAL PROVISIONS

  1. Banks shall develop the policy and internal procedures till August 31, 2000, in compliance with this Regulation.

  2. This Regulation becomes effective from the date of its publication in the Official Monitor of the Republic of Moldova.