Notice No. 08/2016 of June 22 on Interest Rate Risk in the Banking Book

Published in the Official Gazette, First Series, No. 102, of June 22

NOTICE NO. 08/2016

SUBJECT: INTEREST RATE RISK IN THE BANKING BOOK

Considering the importance of monitoring interest rate risk in the banking book, within the framework of the prudential supervision of Financial Institutions authorized by the Bank of Angola.

Given the need to know the impact of a standardized interest rate shock on the economic value of future cash flows associated with the banking book and net interest margin.

In these terms, and under the combined provisions of letters d) and f) of paragraph 1 of Article 21st and letter d) of paragraph 1 of Article 51st, both of Law No. 16/10, of July 15 – Law of the Bank of Angola, and of Article 90th of Law No. 12/15, of June 17 – Law of the Basics of Financial Institutions.

HEREBY DETERMINES:

Article 1.
(Object)
This Notice establishes the analysis requirements to be observed by Financial Institutions under the supervision of the Bank of Angola, within the scope of interest rate risk in the banking book.

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Article 2.
(Scope)
This Notice applies to Financial Institutions under the supervision of the Bank of Angola, hereinafter abbreviated as Institutions, under the terms and conditions provided for in the Law of the Basics of Financial Institutions.

Article 3.
(Definitions)

1. Banking book: set of financial instruments of an Institution consisting of financial instruments not held in the trading book.
2. Yield curve: temporal structure of interest rates that establishes a relationship between the yields of a set of instruments with the same credit risk and currency, but with different maturities.
3. Expected cash flows: future revenue flows of an entity, or investment calculated through the difference between its expected receipts and payments at each future moment.
4. Regulatory capital: "RC" calculated according to Notice No. 02/2016, on regulatory capital.
5. Net interest margin: the difference between total interest income and total interest costs.
6. Short position: contractual position assumed by an investor who will benefit from a price decrease and suffer a loss from a price increase.
7. Long position: contractual position assumed by an investor who will benefit from a price increase and suffer a loss from a price decrease.
8. Interest rate risk: arising from movements in interest rates resulting from mismatches in amount, maturities, or repricing periods observed in financial instruments with interest to be received and paid.

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9. Economic value: the present value of expected cash flows of the Institution's assets, liabilities, and off-balance sheet items.

Article 4.
(General Provisions)

1. Institutions must submit to the Bank of Angola detailed information about their level of exposure to interest rate risk in the banking book, through the forms provided for in Annex I to this Notice, duly filled out, which consider an instantaneous positive or negative shock of 2% (two percent) in interest rates that results in a parallel movement of the yield curve of the same magnitude, estimating the impact on the present value of cash flows and on the net interest margin of the Institutions.
2. Institutions must provide information to the Bank of Angola regarding positive or negative movements in interest rates that imply the most adverse scenario for the Institutions.
3. Without prejudice to the provision of information on an individual basis, parent companies of the financial group must submit the information provided for in this regulation on a consolidated basis, taking into account the consolidation perimeter for prudential purposes, provided for in Notice No. 03/2013, of April 22, on prudential supervision on a consolidated basis.

Article 5.
(Additional Information)
Institutions must provide the following qualitative information regarding their exposure to interest rate risk in the banking book:
a) summary description of the types of positions included in the provision of information, and;

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b) description of the main assumptions made, including those referring to the early repayment of loans, and to the effective maturity of deposits with no fixed maturity date.

Article 6.
(Provision of Information)

1. Institutions must provide the information required in Articles 4th and 5th of this Notice by the end of the month following the semester to which it refers.
2. Without prejudice to the provisions of the previous paragraph, Institutions must evaluate their level of exposure to interest rate risk in the banking book on a continuous basis, and within one business day, inform the Bank of Angola whenever, according to the shock performed, there is a potential reduction in their economic value equal to or greater than 20% (twenty percent) of the Institution's regulatory capital.

Article 7.
(Corrective Measures)

1. Without prejudice to the provisions of the following paragraph of this article, whenever, according to the shock performed, there is a potential reduction in the Institution's economic value equal to or greater than 20% (twenty percent) of its regulatory capital, the Bank of Angola will apply corrective measures.
2. Taking into account the levels of interest rate risk assumed, the specificity of the Institutions, and the analysis of the information provided, the Bank of Angola may determine correction measures whenever it deems necessary.
3. Without prejudice to other procedures and corrective measures, the Bank of Angola may determine the application of the following:
   a) requirement of additional information or analyses regarding the exposure in the banking book subject to interest rate risk;

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b) improvement of policies and processes for managing interest rate risk in the banking book; c) contracting or alienation of financial instruments that result in a decrease in exposure to interest rate risk in the banking book, and; d) reinforcement of the level of regulatory capital.

Article 8.
(Adjustments to the Shock)

1. The Bank of Angola will carry out the updates considered adequate regarding the magnitude and periodicity of the provision of information on the standardized shock established, respectively, in paragraph 2 of Article 4th and in paragraph 1 of Article 6th, both of this Notice, notably in response to developments in the macroeconomic environment or in the reality of a specific financial institution.
2. The Bank of Angola may define differentiated standardized interest rate shocks for different currencies whenever it considers justified due to exposure to currencies other than the Kwanza in a specific Institution or in the financial system, and/or due to the macroeconomic context.

Article 9.
(Sanctions)
Non-compliance with the mandatory norms established in this Notice constitutes an offense punishable under the Law of the Basics of Financial Institutions.

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Article 10.
(Doubts and Omissions)
Doubts and omissions resulting from the interpretation and application of this Notice are resolved by the Bank of Angola.

Article 11.
(Entry into Force)
This Notice enters into force on the date of its publication.

PUBLISH
Luanda, May 16, 2016

THE GOVERNOR
VALTER FILIPE DUARTE DA SILVA

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ANNEX I
Interest Rate Risk in the Banking Book Information Provision Map Exposures by Maturity or Repricing Interval - Impact on Net Position

Time Band | Assets (+) | Liabilities (-) | Position (+/-) | Weighting Factor (A) | Weighted Position (B) --- | --- | --- | --- | --- | --- At sight | 0 | 0.08% | 0 | | 1 - 3 months | 0 | 0.32% | 0 | | 3 - 6 months | 0 | 0.72% | 0 | | 6 - 12 months | 0 | 1.43% | 0 | | 1-2 years | 0 | 2.77% | 0 | | 2 - 3 years | 0 | 4.49% | 0 | | 3 - 4 years | 0 | 6.14% | 0 | | 4 - 5 years | 0 | 7.71% | 0 | | 5 - 7 years | 0 | 10.15% | 0 | | 7 - 10 years | 0 | 13.26% | 0 | | 10 - 15 years | 0 | 18.84% | 0 | | 15 - 20 years | 0 | 22.43% | 0 | |

20 years | 0 | 26.03% | 0 | |
Off-balance sheet items | (+) | (-) | | |

Impact on Net Interest Margin

Time Band | Assets (+) | Liabilities (-) | Position (+/-) | Weighting Factor (F) | Weighted Position (G) --- | --- | --- | --- | --- | --- At sight | 0 | 2.00% | 0 | | At sight - 1 month | 0 | 1.92% | 0 | | 1 - 2 months | 0 | 1.75% | 0 | | 2 - 3 months | 0 | 1.58% | 0 | | 3 - 4 months | 0 | 1.42% | 0 | | 4 - 5 months | 0 | 1.25% | 0 | | 5 - 6 months | 0 | 1.08% | 0 | | 6 - 7 months | 0 | 0.92% | 0 | | 7 - 8 months | 0 | 0.75% | 0 | | 8 - 9 months | 0 | 0.58% | 0 | | 9 - 10 months | 0 | 0.42% | 0 | | 10 - 11 months | 0 | 0.25% | 0 | | 11 - 12 months | 0 | 0.08% | 0 | | Off-balance sheet items | (+) | (-) | | | Net Interest Margin

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ANNEX II
Notes for Filling Out the Interest Rate Risk in the Banking Book Information Provision Map

1. Balance sheet positions and off-balance sheet items included in the banking book and exposed to interest rate risk must be assigned to their respective time band, considering, for fixed-rate instruments, their respective residual maturity periods, and for variable-rate instruments, the period remaining until the next interest rate repricing.
2. The amounts of assets and liabilities must be valued at their fair value, net of specific provisions, whenever applicable.
3. Positions in financial derivatives subject to interest rate risk must be treated as described in Annex I of the Guide on calculation and requirement of regulatory capital for market risk and counterparty credit risk in the trading book.
4. The exchange rate to be used for instruments contracted in foreign currency is the reference exchange rate of the Bank of Angola on the date of information provision.
5. Whenever elements denominated in a foreign currency and exposed to interest rate risk represent more than 5% (five percent) of the banking book, a specific analysis and provision of information for that currency must be carried out.
6. Attached to the forms, the following information must be explicitly stated, with the appropriate level of detail:
   a) how elements were considered whose effective maturity or repricing periods diverge from contractual terms;

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b) calculations performed and eventual hypotheses considered regarding variations in items that indicate an impact due to changes in interest rates, but which are not directly dependent on the interest rate, notably the effects on profits recorded as commissions; and c) hypotheses admitted regarding the sensitivity of non-remunerated deposits to variations in interest rates.
7. The elements necessary for the provision of quantitative information to the Bank of Angola, within the scope of interest rate risk in the banking book, are described below:
(A) Weighting factor, calculated based on:
i) an estimate of the modified duration of the banking book elements with maturity equal to the average term of each time band, assuming that all assets, liabilities, and off-balance sheet items are remunerated at a rate of 5% (five percent) and that the discount rate for the entire maturity spectrum is equally 5% (five percent); and ii) a hypothetical parallel shift of the yield curve of 2% (two percent). (B) Weighted position = position in each time band multiplied by (A). (C) Accumulated impact of a parallel shift of the yield curve of 2% (two percent), corresponding to the sum of positions in each time band multiplied by the weighter. (D) Regulatory capital. (E) Impact of the shock on capital, in percentage, which is obtained by dividing the accumulated impact of a parallel shift of the yield curve of 2% (two percent) (C) by the regulatory capital (D). (F) Weighting factor, calculated based on:
i) the average residual term of each maturity band, and;

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ii) a hypothetical parallel shift of the yield curve of 2% (two percent).
(G) Weighted position = position in each time band multiplied by the weighting factor (F).
(H) Accumulated impact of a parallel shift of the yield curve of 2% (two percent), calculated by the sum of positions in each time band multiplied by the weighter. (I) Net interest margin (interest income – interest costs). (J) Impact of the shock on net interest margin, in percentage, obtained by dividing the accumulated impact of a shift of the yield curve of 2% (two percent) (H) by the net interest margin (I).