More importantly, the fact that credit spreads play an. 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. Department of banking regulation reserve bank of india, central office mumbai 400 001. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Interest rate risk in the banking book in 2015, two documents were published that will have a significant impact on the risk management framework of banking institutions. Regulation 30 directives and interpretations for completion of.
Interest rate risk in the banking book irrbb bankinghub. Therefore, the focus is on the impact of the change of the interest rate level. Interest rate risk in the banking book measurement system attachments. 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. 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. Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book.
At worst, there could be an opportunity loss, but always. In the survey, 80% of the banks indicated that, in a formalized capital requirement, the diversification. Interest rate risk in the banking book marcus evans. 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. 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. Interest rate risk in the banking book irrbb masterclass. Irrbb consultative paper on interest rate risk in the banking book. 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. The tradeoff between delta eve and delta nii by philip j. When interest rates change, the present value and timing of future cash flows change. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. 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, 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. Interest rate risk in the banking book management framework. Identification of interest rate risks in the banking book based on an internal model which can be defined by the banks. More extensive guidance on the expectations for a banks irrbb management process. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory. Table irrbba provides information on a bank s irrbb risk management objective and policy. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices. Whitepaper implementing interest rate risk in the banking. If passages have been quoted from the original, credits have been given. Attachment a governance and the interest rate risk in the banking book management framework attachment b quantitative standards for measuring the capital requirement. 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. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a banks capital and. 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.
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. The key enhancements to the 2004 principles include. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. Interestrate risk in the banking book irrbb regtech. 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. 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. The interest rate risk in the banking book can be measured and controlled at present value or periodically. 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. 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. 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. What is interest rate risk in the banking book irrbb. 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 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. 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.
Guidelines on technical aspects of the management of. 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. 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. 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 deloitte. 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. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Interest rate risk in the banking book zanders treasury. 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. 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. 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. Whitepaper interest rate risk in the banking book irrbb. 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.
An analysis of commercial bank exposure to interest rate risk david m. An analysis of commercial bank exposure to interest rate risk. Leeto tlou and jonathan hacker provided assistance. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift. For example, if rates were to increase and a banks deposits repriced sooner than its loans. 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. 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. 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. 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. Interest rate risk directly affects the values of fixedincome securities. The standards revise the committees 2004 principles for the management and supervision of interest rate risk, which set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. 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. This white paper focuses on understanding how current market conditions low interest.
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. The low interest rate environment has made interest rate in the banking book irrbb an interesting topic. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. 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. Investors need to know which ones will best serve their needs in todays dynamic bond market. 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. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. Houpt, of the boards division of banking supervision and regulation, prepared this article. Interest rate risk in the banking book how to manage. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018.
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. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. 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. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. 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. 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. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Bcbs standard for interest rate risk in the banking book. 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. Interest rate risk in the banking book irrbb definition. The management of interestrate risk in the banking book irrbb has been increasing in importance since 2004, shown by the increased frequency and scale. Andreas dombret, member of board, deutsche bundesbank in. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
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