RBI asks banks to meet forex risk capital norms on continuous basis

The RBI has proposed changes to how banks calculate net foreign exchange exposure, requiring them to maintain capital for forex risk on a continuous, end-of-day basis

The Reserve Bank of India (RBI) on Wednesday proposed changes to the manner in which banks calculate their net foreign exchange exposure and maintain capital for foreign exchange risk.

 

“A bank shall compute net open position and maintain capital charge for foreign exchange risk at both group / consolidated level and solo / standalone level,” the apex bank said.

 

The RBI said banks must meet foreign exchange risk capital requirements on an ongoing basis.

 

“A bank shall meet the capital requirements for foreign exchange risk on a continuous basis, that is, at the close of each business day,” it said.

 

Under the proposed framework, certain positions will be excluded from foreign exchange risk capital requirements. “A bank shall not apply foreign exchange risk capital requirement to any position that is deducted from the bank’s regulatory capital, including a position that is hedging such a position,” the RBI said.

 

It added that holdings of capital instruments deducted from capital or risk-weighted at 1,250 per cent, including a bank’s own regulatory capital instruments and those of other banks or financial entities, will not be included.

 

The central bank has also proposed excluding some securities from foreign exchange risk capital. “A bank shall not apply forex risk capital requirements to securities which are already matured and remain unpaid or have been classified as a non-performing asset / investment,” it said, adding that such exposures will attract capital only for credit risk.

 

Banks have been given the option to exclude certain long-term foreign currency investments from their net open position.

 

“A bank shall have the option to exclude certain structural foreign currency investments from the calculation of net open position,” the RBI said.

 

These include “investments in affiliated but not consolidated entities denominated in foreign currencies” and “investments in consolidated subsidiaries or branches denominated in foreign currencies.”

 

However, the RBI said such exclusions will be subject to conditions. “The risk position shall be taken or maintained for the purpose of hedging partially or fully against the potential that changes in exchange rates could have an adverse effect on its capital ratio,” it said.

 

Explaining the rationale, the central bank said matching foreign currency assets and liabilities does not always protect capital adequacy.

 

“A matched currency risk position will protect a bank against loss from movements in exchange rates, but will not necessarily protect its capital adequacy ratio,” the RBI said.

 

It added that exchange rate movements can still affect a bank’s capital-to-asset ratio.