Video would be covering about regulatory of interest rate risk in banking books. 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. Interest rate risk in the banking book irrbb levels for. 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.
Irrbb consultative paper on interest rate risk in the. Implementing interest rate risk in the banking book irrbb. The list of acronyms and abbreviations related to irrbb interest rate risk in the banking book. What is interest rate risk in the banking book irrbb. How to manage interest rate risk in the banking book. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. In addition, the basel interest rate shock is sufficiently risksensitive and gives the supervisor a fundamental overview concerning the interest rate risk in the banking book and the risk bearing capacity of each bank. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Irrbb includes potentially adverse effects on earnings, capital, or both. Support for the comprehensive and detailed joint association response to the bcbs cd on irrbb in this letter, ebf presents the view of its members and recommends changes to the cd that ebf hopes will be helpful to bcbs in updating the regulatory framework for irrbb.
Interest rate risk in the banking book irrbb bankinghub. 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. On irrbb management in april 2016, bcbs issued standards for interest rate risk in the banking book. Standards on the interest risk in the banking book irrbb. 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. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. Interest rate risk in the banking book means losses to earnings.
Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Meeting the practical challenges moodys analytics introduction in a world of low interest rates, the thought of what could happen if there is a sudden interest rate shock. The basel committee on banking supervision bcbs recently published final interest rate risk in the banking book irrbb regulations. Eacb contribution to the discussion on interest rate risk. The tradeoff between delta eve and delta nii by philip j. The standards, issued for the first time in more than a decade, introduced a strengthened pillar 2 approach and set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. 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. This publication can be found online on the ebf website and is. To reduce excessive interest rate risk, banks will need to ensure that the right processes for.
The management of interest rate risk is therefore critical to the stability of any banking corporation. 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. 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 white paper examines the key elements of basils updated rules for irrbb and the effect they will have on a banks alm strategy. Guidelines on the management of interest rate risk arising.
Table irrbba provides information on a bank s irrbb risk management objective and policy. Principles for the management and supervision of interest rate risk henceforth, the irr principles. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities. 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 is an integral part of banking business, and may even be a source of profit. 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. The management of interestrate risk in the banking book irrbb has been increasing in importance since 2004, shown by the increased frequency and scale. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices. In such a context, this white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and. 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 levels for indian banks article pdf available in ssrn electronic journal may 2012 with 339 reads how we measure reads.
Excessive irrbb can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately. The final standard updated a set of principles laid out in 2004, to reflect changes in the market. Interest rate risk in the banking book irrbb masterclass. Whitepaper interest rate risk in the banking book irrbb. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. The webinar was attended by 285 industry professionals, and below. The interest rate risk in the banking book can be measured and controlled at present value or periodically. 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. For example, if rates were to increase and a bank s 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.
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. It further explores how a wellthoughtout tenor mismatch strategy can initially boost net interest income. Both papers combined will have a significant impact on how banks measure, monitor, hedge and manage their interest rate risk. Sources of irrbb include interest rate gaps, basis risk, yield curve risk and option risk. Template irrbb1 provides quantitative irrbb information, including the impact of. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Implementing interest rate risk in the banking book irrbb polling results in march 2017, moodys analytics, together with asia risk and, held a webinar, interest rate risk in the banking book. The swiss risk association sra is a nonprofit organisation and open forum for risk management and financial engineering. Interestrate risk in the banking book irrbb regtech. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Interest rate risk in the banking book irrbb frequently asked questions this publication has been prepared by the european banking federation in response to the questions frequently raised during outreach meetings on the treatment of the interest rate risk in the banking book.
These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift. Banking book means positions of financial instruments or other transactions not intended for trading purpose, or financial instruments which were intended, at the onset, to be held for a long period of time or until maturity. Irrbb already has full recognition and is best treated under a pillar 2 approach. Interest rate risk in the banking book irrbb enhancements on. Ecb finds interest rate risk is well managed in most. The exercise was designed to provide ecb banking supervision with additional information on the interest rate sensitivity of the net interest income and the economic value of equity of banks banking book positions. Bcbs revised standards for interest rate risk in the banking book irrbb published on april 22, 2016 april 22, 2016 114 likes 9 comments. This white paper focuses on understanding how current market conditions low interest. Interest rate risk in the banking book contents irrbb. As defined by the bcbs, irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in interest rates.
Compliance with the basel committees standards on interestrate risk in the banking book bcbs 368 and eba final report july 2018 on interest rate risk. 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. Bcbs revised standards for interest rate risk in the. The ecb conducted a sensitivity analysis of interest rate risk in the banking books based on yearend 2016 numbers. 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. 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. 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. Interest rate risk in the banking book irrbb ebf faq a. How to manage interest rate risk in the banking book considering the monetary policy and the new regulation. The low interest rate environment has made interest rate in the banking book irrbb an interesting topic. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. Interest rate risk in the banking book irrbb interest rate risk in the banking book irrbb the european banking authority eba has issued an update of its interest rate risk in the banking book irrbb guidelines as a first step in the implementation of the updated basel committee on banking supervision bcbs standards adopted in april 2016. Interest rate risk in the banking book irrbb banking. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb.
The interest rate risk in banking book refers to the risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Unofficial translation this translation is for the. Interest rate risk in the banking book irrbb june uk finance. Irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in interest rates that affect the banks banking. Implementing interest rate risk in the banking book. Interest rate risk in the banking book risk library. Interest rate risk in the banking book irrbb definition. 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. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. In the survey, 80% of the banks indicated that, in a formalized capital requirement, the diversification between credit and interest rate risk must be taken into account. 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. Whitepaper implementing interest rate risk in the banking. 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.
Therefore, the focus is on the impact of the change of the interest rate level. Irrbb refers more generally to the current or prospective risk to both the banks capital and earnings arising from adverse movements in riskfree interest rates. The new basel committee on banking supervision bcbs standards for irrbb come into force. 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. The basel comittee on banking supervision bcbs made new guidelines for regulations available in april 2016. A practical approach summary in april 2016, the basel committee on banking supervision bcbs published the final standard on capital framework for interest rate risk in the banking book irrbb. Table irrbba interest rate risk in the banking book irrbb risk management objective and policies 2 template irrbb1 quantitative information on 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.
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