to g - secs beyond an internally agreed total proportion of assets ; or the excess slr should be commensurate in risk terms with the bank ’ s capital allocation for investments. 6. in order to further address treasury - level incentive issues, banks may consider imposing dynamic stop loss limits. in order to avoid further losses once they exceed a particular percentage of assigned risk capital, any risk addition must slow down, potentially even stop ( depending on the extent of realized capital loss ), and not be gerrymandered through security rotation or by senior management turning a blind eye. instead, the realised losses and residual risks should escalate through cro to the bank board and the risk in the investment portfolio gradually scaled down in a time - bound manner depending on its size. 7. in addition, there should be ex - post settling up as a career incentive for the treasury head and all significant risk - takers : those who swing bank investment portfolio for the fences and put bank capital at excessive limits relative to the approved levels should be held accountable when their bets go bad due to poor or no risk management. not all volatility is due to “ black swan ” events that deserve risk - takers being carried through. 8. finally, there is usually an uninspiring chatter every time g - sec yields show a sustained rise that the market is irrational in its movements. not only is it not difficult to separate rational market movements from irrational ones at high frequency, such proclamations are a sign that those betting on government bonds while chatting such are clueless about the drivers of market movements. isn ’ t that a good time for the bank senior management to rein in their treasury portfolio risks? none of this is rocket science but does require at the highest level of bank governance mechanisms a recognition of interest rate risk, an incentive to manage it, and a top - down organizational strategy to implement it. measures that address the duration risk of banks how may banks better manage their duration risk? the efficiency with which this risk is currently managed leaves a lot to be desired. while duration risk management is constrained by the g - secs issuer ’ s choice of maturity structure and liquidity in the secondary bond market, the risk can be managed more nimbly by also availing of hedging markets. psbs account for about 70. 6 % of the banking sector assets. however, their participation in such hedging markets is limited or negligible. while their share in

in addition to deferment in recognition of valuation losses by six months, from september 2013 to march 2014. the impact of the persistent rise in yields during phase ii was eased to a great degree by regular open market purchases by rbi, which are typically employed for durable liquidity management and to ensure the proximity of money market rates to the overnight policy rate, rather than for management of long - term g - sec yields. these are also the sort of measures some banks have again requested rbi to adopt in the current phase of rising yields, wherein yields have moved up from around 6. 50 % at end - august 2017 to around 7. 45 % now. interest rate risk of banks cannot be managed over and over again by their regulator. the regulator, in interest of financial stability, is caught in such situations between a rock and a hard place, and often obliges. however, the trend of regular use of ex post regulatory dispensation to ease the interest rate risk of banks is not desirable from the point of view of efficient price discovery in the g - sec market and effective market discipline on the g - sec issuer. nor does it augur well for developing a sound risk management culture at banks. recourse to such 8 / 12 bis central bankers'speeches asymmetric options – heads i win, tails the regulator dispenses – is akin to the use of steroids. they get addictive and have long - term adverse effects in the form of frequent relapse even though their use may be justified to relieve occasional intense pain. hence, it would be better for the banking system to build its own immunity and strength, i. e., emphasise internally – and put in place processes for – efficient management of interest - rate risk. 2 let me then discuss what could be done by banks to achieve this. managing interest rate risk at banks management of the increasing interest rate exposure of the banking system needs to address both sides of the sovereign - bank nexus. while the long - term investor participation in government bond market needs to be deepened – both domestically and internationally, and the maturity structure of government debt kept sensitive to implications for bank balance - sheets, banks also need to manage the interest rate risk on the balance sheet by dynamically managing its size and duration as well as accessing markets for risk transfer. the desirable options follow from the bond price equation i presented earlier : ∆p = – p × d × ∆y. interest rate risk management options can