RBI Report warns mark-to-market losses for banks as bond yields rise

1 Jul 2022 , 12:57 PM

The Reserve Bank of India’s (RBI) Financial Stability report warns, “Hardening of government bond yields in the face of additional borrowing may result in mark-to-market losses for banks.”

Banks are vulnerable to trading losses as rising interest rates erode the value of their bond positions.

If banks’ appetite for holding sovereign debt wanes in such a scenario, negative feedback could ensue.

“This could potentially reduce their lending and harm overall economic activity, particularly in countries with high fiscal vulnerability and undercapitalized banking systems,” highlighted the report.

With several emerging markets’ sovereign credit outlooks deteriorating, the relationship between sovereign debt holdings and bank balance sheets poses risks to macro-financial stability.

During the three-month period, benchmark bond yields increased by up to 76 basis points, reaching a high of 7.60% on June 13. One basis point equals 0.01%.

The report cited the IMF’s policy recommendations to reduce risk. Among these are the preservation of bank capital resources to absorb losses and the conduct of bank stress tests.