An numerical example for the interestrate risk for banks. The sensitivity of the financial institutions earnings or the economic value of its capital to adverse changes in interest rates, foreign exchanges rates, commodity prices, or equity prices. Bcbs proposals for interest rate risk in the banking book irrbb. Other risks that banks quantify in their capital requirement models include pensionassets risk 40 percent, interestrate risk in the banking book 30 percent.
Whitepaper implementing interest rate risk in the banking. A particular definition was introduced related to the interest rate risk capital charge. The interest rate risk in the banking book can be measured and controlled at present value or periodically. In the consultative document the bcbs sets out two options for the regulatory treatment of interest rate risk in the banking book irrbb. The ability of management to identify, measure, monitor, and control exposure to market risk given the institutions size, complexity, and risk profile. Significant market risk factors the bank is exposed to and are overseen by risk management groups in that area are. Gap risk, which arises from the term structure of banking book instruments resulting in rate changes impacting instruments at different times. This began in june 2004 when the basel committee on banking. Interest rate risk in the banking book consultative. Standards on the interest risk in the banking book irrbb. Capital adequacy framework basel ii riskweighted assets. Interest rate risk in the banking book irrbb bankinghub. Irrbb consultative paper on interest rate risk in the.
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. Enhanced requirements for irrbb management insights from ey european irrbb survey 2016 for banks 1 historically, interest rate risk in the banking book irrbb has been a risk to which many in the market have paid less attention compared to liquidity risk and credit risk. Section i sets out the methodologies the pra will use to inform the setting of a firms pillar 2a capital requirement for credit risk, market risk, operational risk, counterparty credit risk, credit concentration risk, interest rate risk in the nontrading book irrbb, pension obligation risk and rfb group risk. Interest rate risk in the banking book irrbb is the risk of loss in earnings or a fall in the value of banking book items as a consequence of movements in interest rates.
Calculation of regulatory capital requirements for the interest rate risk in the banking book based on a standard model defined by the bcbs. This would include, among others, the effectiveness of the bank s risk management systems in identifying, assessing measuring, monitoring and managing various risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual risk. Guidelines on the management of interest rate risk arising. 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. The first approach is a standardised pillar 1 minimum capital requirements approach which the bcbs believes would promote greater consistency, transparency and comparability. Interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or prospective risk to a bank s capital and earnings, arising from adverse movements in interest rates that affect the bank s banking book positions. Interconnections between irrbb and liquidity management video. Firms are required by the reporting pillar 2 part of the pra rulebook, or may be asked, to submit data to inform the pras approach to setting pillar 2a capital requirements. Identification of interest rate risks in the banking book based on an internal model which. Basel iv revised trading and banking book boundary for market risk. Interest rate risk including model risk from embedded optionality and from modeling behavioral assumptions for. 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. The interest rate risk in the banking book irrbb is one of the many regulatory frameworks that financial institutions must put into practice in the months and years ahead. Deutsche bank annual report 2017 nontrading market risk. Banks need to ensure they can address all the requirements of the regulators whilst ensuring regulatory capital optimisation. More pillar 2 on the way basel finalises standards for.
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. Ojk also provided tables containing the reporting requirements. Interest rate risk in the banking book irrbb more specifically refers to the current or prospective risk to the bank s capital and earnings arising from adverse movements in interest rates affect the institutions banking book. For the trading book, specific methodologies were proposed. For example, convexity adjustments on constant maturity swaps cms and other products can generate significant vega risks, which are hedged using plain vanilla interest rate swaptions which are subject to vega and curvature. Banks can take an interest rate position in the banking book, rather than the trading book, and would not be subject to a pillar 1 minimum capital requirements. Inadequate measurement, management, and control of irrbb could. Any changes in interest rates have an impact on the present value of future cash flows on the bank. In calculating its market risk capital charge for interest rate risk, a bank shall include all its trading book positions, whether long or short, in instruments including derivatives and off balance sheet instruments whose market values are affected by changes in interest rates. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. 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. When interest rates change, the present value and timing of future cash flows change.
Interconnections between irrbb and liquidity management. The pras methodologies for setting pillar 2 capital. Guidelines on the management of interest rate risk arising from nontrading book activities 2 abbreviations alco asset and liability management committee alm asset and liability management bcbs basel committee on banking supervision bsg banking stakeholder group cet1 common equity tier 1 csrbb credit spread risk from nontrading book activities crd capital. Interest rate risk is a bank s exposure to adverse movements in interest rates. Interest rate risk in the banking book irrbb therefore reflects both the bank s fundamental business model and its assetliabilitymanagement alm strategy.
Interest rate risk in the banking book irrbb is part of the basel capital. Agenda interest rate risk management strategies and. 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. The objective of irt provisions is to limit opportunities for capital arbitrage between banking book and trading book.
These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk 4, which laid out the principles and the methods expected to be used by banks for measuring, managing, monitoring and. Banks must disclose, among other requirements, the impact of interest rate shocks on. Interest rate risk in the banking book objective and key requirements of this prudential standard this prudential standard sets out the requirements that an authorised deposittaking institution must meet in relation to interest rate risk in the banking book. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. Basel committee on banking supervision consultative. 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. Basel iv revised trading and banking book boundary for. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn. Among them, interest rate risk receives special attention, as expected. 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. Guidance note market risk 5 ciu modified look through method 66. Basis risk, which relates to the impact of rela tive changes in interest. What is interest rate risk in the banking book irrbb.
Interest rate risk in the banking book and capital. Ojk proposes guidelines to measure interest rate risk in. The basel committee on banking supervision bcbs published finalised revisions to the standards for assessment of interest rate risk in the banking book irrbb on 21 april 2016 following its 2015 consultation on irrbb the basel committee has decided to leave irrbb within the pillar 2 framework. The new irrbb framework introduces nii measures and capital requirements calculation based on a mixed nimeve approach. Before assuming this role he has been senior portfolio manager for the investment books and a senior trader interest rate derivatives. Interest rate risk in the banking book irrbb june uk finance. Ojk issued a consultation on the guidelines for measurement and calculation of interest rate risk in the banking book irrbb for commercial banks. Nontrading market risk arises from market movements, primarily outside the activities of our trading units, in our banking book and from offbalance sheet items. From a regulatory perspective, market risk stems from all the positions included in banks trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet.
This risk arises primarily from loans, deposits, liquid assets and tradeable instruments used to hedge banking book exposures. The pras methodologies for setting pillar 2 capital bank of england. Interest rate risk in the banking book irrbb definition. Guidance note on the calculation of capital requirement. The capital charge for interest rate related instruments and equities would apply to the current market value of these items. Irts of equity risk and interest rate risk between the banking book and the trading book, to supplement the existing treatment of internal transfers of credit risk. Next to his daytoday activities for the bank, frank is a board member of rabobanks pension fund, a guest lecturer on derivatives and actively involved in. Excessive irrbb can pose a significant threat to a bank s current capital base andor future earnings if not managed appropriately. We will now see how the capital requirement is worked out for the risk of holding or taking position in debt securities and other interest rate related instruments in the trading book.
Revised trading and banking book boundary for market risk presumed assignment to the trading book alternative allocation possible through explicit supervisory approval there is a general presumption that any of the following instruments are being held for at least one of the above. By analysing the balance sheet of a small italian bank during the years 2009 and 2010, we outlined its liquidity profile, the variables that influenced its dynamics and their effects on the bank s global management, with particular attention to the interest margin and the interest rate risk in the banking book. Cbn releases revised guidance note on regulatory capital. Economic capital charge for interest rate risk in the banking book, including gap risk, basis risk and option risk, such as the risk of a change in client behavior embedded in modelled nonmaturity deposits or prepayment risk.
1288 957 1147 1105 1365 262 264 1484 1041 347 1155 229 752 438 177 347 703 1270 291 54 814 1491 172 122 1534 1123 223 1223 1341 359 16 426 420 1076 688 447 961 723 1210 36 864 957 258 1072 264 768