Framework for adopting a capital charge for market risk in Rwanda and training of the staff of the NBR and the banks

Context

In recent years, the National Bank of Rwanda (NBR) has undertaken a number of initiatives to strengthen its regulatory framework for financial institutions. These include the development of a risk-based supervisory framework, enhancement of its off-site surveillance system and initiation of plans to develop a framework for the practice of consolidated supervision. The NBR wanted to further strengthen its capital adequacy framework by adopting a capital charge for market risk.

Objectifs

The main objective of this study was to assist the National Bank of Rwanda (NBR) to develop a framework to adopt a capital charge for market risk.

The specific objectives are to:

• Make an overview of market risks inherent to the banking sector;
• Elaborate guidelines and methods for identification, measurement, analysis and management of market risks;
• Identify banking products/instruments in the trading and banking books which carry market risk;
• Calculate a capital charge for market risk using the Standardized Measurement Approach given by the Basel Committee on Banking Supervision;
• Make a report and presentation on the latest regulatory perspectives and other significant considerations affecting capital adequacy requirements for banks and other financial institutions;
• Use real-world financial statements and prepare a computerized model to illustrate the computation of a capital charge for market risks;
• Write a policy paper on development of a framework to adopt a capital charge for market risk;
• Elaborate guidelines on a capital charge for market risk to be introduced to the staff of both the NBR and banks;
• Write a draft proposal for an amendment to the existing capital adequacy requirement.

Services provided by CESS

• Survey on financial institutions;
• Identify the products/instruments on the banks’ trading and banking books which carry market risk;
• Write a draft report on guidelines and best practices (identification, measurement, monitoring and control of market risks);
• Develop an Excel spreadsheet for the calculation of market risk capital charge;
• Perform training and dissemination seminars for staff of the NBR, commercial banks and other financial institutions

Resultsachieved

• Draft report “Overview on market risk management practices and market risk-sensitive financial instruments in Rwanda’s banking sector”;
• Draft report “Capital Adequacy Requirement for Market Risk”;
• Draft report on “ Interest rate risk management”;
• Excel spreadsheet for the calculation of market risk capital charge and the capital adequacy ratio;
• Training of the staff of the NBR and the financial institutions on the proposed market risk capital charge framework..

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