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RBZ moves on market shocks

Godfrey Marawanyika

THE Reserve Bank of Zimbabwe has formulated a market risk policy to ensure that banks with significant exposure retain adequate capital against adverse shocks.

ONT face=”Verdana, Arial, Helvetica, sans-serif”>The regulations shall apply to all locally-incorporated banks and their associates together with subsidiaries of foreign banks operating in Zimbabwe.

Market risk is defined as the risk of losses in on-and off-balance sheet positions arising from movements in market prices.

In a policy document titled Maintenance of Capital for Market Risk prepared by the Banking Supervision department, the central bank set out its role in determining the adequacy of capital support to curb potential losses arising from market risk.

The regulations will be applied in conjunction with the Banking Act and banking regulations.

“.In addition, foreign subsidiaries and/or branches of locally incorporated banks operating in other jurisdictions are subject to the market risk capital requirements because the primary responsibility for supervising capital adequacy of these financial institutions rests with the RBZ as the home supervisor,” the guidelines state.

“Financial institutions which have only a limited amount of risk will be exempted from the market risk capital requirement and required only to calculate credit risk-based capital on operational capital.”

The guidelines address risks pertaining to interest rate related instruments and equities in the trading book. The regulations also address the foreign exchange risk and commodities risk through the financial year.

Under the guidelines, financial institutions with minimal market risk exposure are exempted from observing the allocation of capital for market risk.

The regulations state that it is the responsibility of the financial institution’s board and management to ensure that it has in place adequate systems to identify, measure and manage market risks in both its trading and banking books and to hold appropriate capital gains against those risks.

Last year, Barbican, Royal, Century, Trust Bank and several discount houses and asset management firms were closed by the RBZ after they were exposed in what turned out to be illicit market dealings.

Capital adequacy positions for institutions exempted will be assessed through credit risk-based capital only.

The institutions will be required, however, to report their market risk exposures on an annual basis, based on their positions as at December 31.

The market capital regulations apply to every financial institution whose trading activities on an institution-wide basis meet the following conditions:

* market risk positions exceed 2,5% of its total on-and off-balance sheet positions at any given time;

* trading activities equal $1 billion or more; and

* its calculated credit risk-based capital adequacy ratio is not less than 10%.

“All of the above criteria must not be met in order for exemption to be granted,” RBZ said.

“The Reserve Bank of Zimbabwe may however apply the de minimis exemption to any financial institution if it is deemed necessary or appropriate for safe and sound banking practices.”

The regulations state that the central bank might exclude an institution otherwise meeting the set conditions from coverage under the guidelines if it determines that the institution meets such criteria “as a consequence of accounting, operational, or similar considerations and the RBZ deems it consistent with safe and sound banking practices”, the RBZ said.

“Overall, the exemption status will be assessed and determined on a case by case basis. Exempt institutions will be separately advised. All institutions which would have been exempted from the market risk capital requirement should notify and discuss with the RBZ if they wish to start or increase significantly trading activities.

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