Effective measurement and management of interest rate risk is crucial for banks to manage liabilities and assets portfolio, which are exposed to risks emanating from adverse movements in interest rates. The changes in interest rates not only impair the current and potential future earnings but may also potentially threaten the bank’s solvency.

2.    To strengthen interest rate risk monitoring and measurement, State Bank of Pakistan has developed Guidelines on IRRM (attached). Banks/DFIs are advised to make adequate and reliable arrangements for adoption of the Guidelines in terms of the following: -

a.	Develop an IRRM policy as a separate document or as a distinct part of a comprehensive risk management policy duly approved by the Board of Directors of banks /DFIs.
b.	Formulate IRRM processes and procedures for covering trading and banking books aspects separately.
c.	Ensure to determine the impact of interest rate exposure arising from balance sheet structure on the bank’s earnings and economic value of equity.
d.	Determine and allocate appropriate capital for interest rate risk in the banking book as also required under Internal Capital Adequacy Assessment Process of Pillar II – Basel Accord.
e.	Use any appropriate statistical tools along with other qualitative and quantitative techniques for measuring interest rate risk. Models mentioned in these Guidelines are for the illustration purposes. However, the banks are advised to clearly spell out the rationale for selection of a particular technique or model for managing their interest rate exposures.
f.	Annexures at the end of these Guidelines are provided to facilitate and enhance understanding on the subject.

3.    According to size and complexity of the activities, all banks / DFIs are advised to make adequate and reliable arrangements for adoption of the Guidelines and put in place effective interest rate risk monitoring and management system by 30th September, 2015. The compliance will also be reviewed by the State Bank’s inspection team during their on-site inspections.

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Encl: Guidelines on Interest Rate Risk Management