Rising interest rates and implications for banking supervision

Highlights

• The recent market turmoil exposed heightened vulnerabilities of banks with material exposures in long-term, fixed rate assets that are fuelled by shorter-term, less stable funding. As interest rates rise, such entities may incur significant declines in asset values, while being exposed to volatile funds providers who may flee at the first sign of trouble, triggering a broader crisis of confidence.
• While regulatory requirements are fundamental, they cannot, in isolation, address all ways in which higher rates could impact a bank's solvency and liquidity. Moreover, capital requirements are sensitive to banks' accounting classification choices, while liquidity rules are premised on assumptions about deposit stickiness and the ability to sell assets at a reasonable cost.
• The supervisory review process, on the other hand, takes into account bank-specific characteristics and provides supervisors with various tools to address the confluence of risks caused by rising rates, and the ability to act preemptively before risks crystallise.
• Further guidance that supports supervisors' ability and will to act may help to provide structure and consistency to supervisory decision-making, while allowing room for judgment.