At worst, there could be an opportunity loss, but always. The diversification with credit risk in particular demands attention, because this risk is also concentrated in the banking book and possibly overlaps with the irrbb. With the interest rate risk of the banking book, the basel committee on banking supervision bcbs 1 aims primarily to address the potential loss of economic value of institutions from a change in the interest rates called irr and credit spread risk csr in the banking book 2. Interest rate risk in the banking book irrbb masterclass. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Due to different fixed interest rates of assets and liabilities allocated to the banking book, credit institutions are exposed to a risk of changing interest rates on the. The management of interestrate risk in the banking book irrbb has been increasing in importance since 2004, shown by the increased frequency and scale. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect.
Interest rate risk in the banking book irrbb bankinghub. Whitepaper interest rate risk in the banking book irrbb. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Regulation 30 directives and interpretations for completion of. For example, if rates were to increase and a banks deposits repriced sooner than its loans, it could result in the bank paying out more interest on deposits than the interest it is receiving from loans. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk4, which laid out the principles and the methods expected to be used by banks for measuring, managing, monitoring and. These guidelines on managing interest rate risk in the banking book are intended to provide guidance on designing the strategies and processes required for identifying, measuring, controlling and monitoring interest rate risks in the banking book. The low interest rate environment has made interest rate in the banking book irrbb an interesting topic. This white paper focuses on understanding how current market conditions low interest. The consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book irrbb expands upon and is intended to ultimately replace the basel committees 2004 principles for the management and supervision of interest rate risk.
More importantly, the fact that credit spreads play an. The book is essential reading for all those involved with interest rate risk in the banking book but particularly those working in a bank alm function who wish to gain a wider appreciation of the context in which they operate, more generalist and senior bankers who need a grasp of the fundamentals and those working in a trading risk function. In response to the new standards, the hkma published a consultation paper regarding the proposal to update the current spm module ir1 interest rate risk management and the return of mabs12 interest rate risk exposure in june 2017. The different nature of the interest rate risk in the banking book when compared to the interest rate risk in the trading book as well as the variety of the products, approaches and assumptions to be made around certain products across banks and jurisdictions make irrbb standardization under. Interest rate risk in the banking book zanders treasury.
Interest rate risk in the banking book irrbb share now due to different fixed interest rates of assets and liabilities allocated to the banking book, credit institutions are exposed to a risk of changing interest rates on the money and capital markets. Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. The tradeoff between delta eve and delta nii by philip j. This book reveals how more than three dozen experts control and preserve the value of their own fixed income portfoliosfrom choosing the right risk management product to monitoring and evaluating the effectiveness of hedge management strategies. Interest rate risk in the banking book how to manage. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Attachment a governance and the interest rate risk in the banking book management framework attachment b quantitative standards for measuring the capital requirement. Interest rate risk in the banking book, written by industry expert paul newson, provides a thorough guide to the new regulatory requirements surrounding irrbb and demonstrates the importance of good governance.
Draft guidelines on governance, measurement, and management of interest rate risk in banking book statement on development and regulatory policies by rbi dated october 4, 2016 available from website. Interest rate risk in the banking book irrbb definition. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. Whitepaper implementing interest rate risk in the banking.
The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. If passages have been quoted from the original, credits have been given. Interest rate risk in the banking book irrbb irrbb overview interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Andreas dombret, member of board, deutsche bundesbank in. The interest rate risk in the banking book can be measured and controlled at present value or periodically. When interest rates change, the present value and timing of future cash flows change. Interest rate risk in the banking book irrbb is part of the basel capital framework under pillar 2 and principles for the management and supervision of interest rate risk were set out in 2004 by the bcbs. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. Guidelines on technical aspects of the management of. This risk includes foreign currency risk, which is defined as the actual or potential risk that affects results or capital as a result of adverse changes in exchange rates in the banking book. Course on managing interest rate risk in the banking book is going to open on 28 feb and finish on 01 mar 2018 it will be a matchless course at the downtown conference center in new york city, new york usa it will be a trendsetting course, wellknown as one of the most innovative meetings within the banking, financial services, risk analysis, risk management, interest rate and banking. Interest rate risk directly affects the values of fixedincome securities.
Bcbs standard for interest rate risk in the banking book. Interest rate risk in the banking book irrbb in the current phase of low interest rates, it becomes increasingly difficult for banks to generate sufficient returns, as their business models often depend heavily on interest income. Irrbb interest rate risk in the banking book a bearingpoint accelerator eba and the basel committee reacted to the current low interest environment with new or further detailed requirements for banks dealing with the risk arising from general banking business, known as interest rate risk in the banking book irrbb. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect banking book positions. Recall that the interest rate risk on the banking book are within pillar 2 and as such they are not linked to banks capital requirements.
Interest rate risk in the banking book, written by industry expert paul newson, provides a thorough guide to the new regulatory requirements surrounding irrbb and demonstrates the importance of good governance the author explains the nature of interest rate risks in simple language, describing the methods typically used to measure them, with the added advantage of many worked examples. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. An analysis of commercial bank exposure to interest rate risk david m. Houpt, of the boards division of banking supervision and regulation, prepared this article. Such unconventional monetary policy has an impact on interest rates, and therefore, requires a closer monitoring of the interest rate risk in the banking book irrbb. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. Interest rate risk in the banking book arises when there is a mismatch between the maturity profiles of rate sensitive assets rsa and rate sensitive liabilities rsl causes definition the risk to earnings or capital arising from the movement of interest rates interest rate risk in the banking book. Interest rate risk in the banking book management framework. As a result, institutions are now in the process of finding ways to comply with impending regulations whilst seeing what the most effective ways of calculating, and minimising, risk are. Interest rate risk in the banking book irrbb, to take effect from 31 december 2017, sets out pillar 2 requirements for the identification, measurement, monitoring and control of irrbb, and disclosure requirements under prescribed interest rate shock scenarios. The interest rate risk in banking book refers to the risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. Template irrbb1 provides quantitative irrbb information, including the impact of interest rate shocks on their change in economic value of equity and net interest income, computed based on a set of prescribed interest rate shock scenarios.
Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. An analysis of commercial bank exposure to interest rate risk. Interestrate risk in the banking book irrbb regtech. The basel comittee on banking supervision bcbs made new guidelines for regulations available in april 2016. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. In the survey, 80% of the banks indicated that, in a formalized capital requirement, the diversification. The key enhancements to the 2004 principles include. On the 3rd of june 2016, marcus evans held a webinar entitled interest rate risk in the banking book in partnership with oracle for their global financial market webinars portfolio.
Interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. The bcbs published its final standards on interest rate risk in the banking book irrbb in april 2016, with guidelines set to be implemented by 2018. Interest rate risk in the banking book irrbb deloitte. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a banks capital and. On june 8, 2015 the basel committee for banking supervision bcbs published the consultative paper 319 on interest rate risks in the banking book, which has been developed by the task force on interest rate risk in the banking book tfir over the last years. Interest rate risk in the banking book marcus evans. However, from an earnings point of view, there cannot be an interest rate loss from investing equity in fixed rate assets in order to stabilize earning flows. Therefore, the focus is on the impact of the change of the interest rate level. Table irrbba provides information on a bank s irrbb risk management objective and policy.
Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. Identification of interest rate risks in the banking book based on an internal model which can be defined by the banks. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift. In the present value perspective, the risk is quantified as an economic value change of the total banking book cash flow in case of changes in the yield curve. More extensive guidance on the expectations for a banks irrbb management process. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. Interest rate risk in the banking book measurement system attachments. Department of banking regulation reserve bank of india, central office mumbai 400 001. Leeto tlou and jonathan hacker provided assistance. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory. If a bank solely minimises its economic value risk by matching the repricing of its assets with liabilities beyond the short term, it could run the risk of earnings. Investors need to know which ones will best serve their needs in todays dynamic bond market. Irrbb consultative paper on interest rate risk in the banking book. Interest rate risk in the banking book irrbb interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits.