Development of a market risk management and capital allocation framework for the Rwandan banking sector

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RISK MANAGEMENT

CUSTOMER:

National Bank of Rwanda (BNR)

Project funded by the African Development Bank (AfDB

  • 2012

BACKGROUND AND PROBLEM:

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 monitoring framework, the improvement of its off-site monitoring system, and the development of plans to develop a framework for the practice of consolidated surveillance. In pursuing the reforms of its regulatory framework, the NBR wants to further strengthen its capital adequacy framework by adopting a capital charge for market risk.

To this end, we have assisted the NBR in the development of capital adequacy for market risk. Our mandate was to strengthen the capacity of the staff of the Department of Banking Supervision and to support them in the development of the new regulatory capital framework for market risk in accordance with the recommendations of the Basel Committee on Banking Supervision.

SERVICES PROVIDED:

Our mandate was to assist the staff of the National Bank of Rwanda (NBR) in developing the regulatory framework for capital adequacy for market risk.

To this end, our mission was to support the Department of Banking Supervision in the development of a policy document and guidelines on capital charge for market risk, to conduct a scoping study the current market risk management practices by banking institutions in Rwanda, and to make recommendations for improving the existing framework, and to produce the necessary reform documents. Part of the mission was also the training of the staff of the NBR and the commercial banks’ professionals involved in market risk management.

RESULTS OBTAINED:

  1. Diagnosis of the Rwandan banking sector. Our involvement has made it possible to make the diagnostic of the Rwandan banking sector in terms of the practices of Rwandan banking institutions regarding the management of market risk, and to formulate recommendations for the improvement of bank policy documents and also market risk management practices.
  2. Policy document and guidelines. The production of the policy document and guidelines for the regulatory capital requirement and management of market risk following the Basel Committee’s standardized measurement approach on banking supervision.
  3. Capital adequacy model. The development of the computerized model (Excel spreadsheet) to calculate the capital charge for market risk using real financial statements of banks.
  4. Training of actors. Training of the staff of the Central Bank and processionals of the commercial banks on the best practices for managing market risk and the new regulatory capital adequacy framework to be adopted.

This work served as the basis for the change in banking regulation in Rwanda to introduce regulatory capital requirement for market risk. It also enabled the production of policy documents and guidelines for better management of market risk components. Commercial banks have been able to improve their internal market risk management framework.

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