Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios. Marcel bluhm hkma interest rate risk in the banking book 27 27. Interest rate risk in the banking book irrbb june uk finance. An examination of the banking crises of the 1980s and early 1990s, federal deposit insurance corporation. In april 2016, the basel committee on banking supervision published the final standard on capital framework for interest rate risk in the banking book irrbb. 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 final basel standards allow supervisors to impose capital charges under. Table irrbba interest rate risk in the banking book irrbb risk management objective and policies 2 template irrbb1 quantitative information on irrbb. The final standard details twelve principles for the management, control, and supervision of irrbb, based on pillar 2 of basel iii.
Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. Interest rate risk in banking book irrbb refers to the current or prospective risk. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. A summary of bcbs interest rate risk in the banking book. In april 2016, bcbs issued standards for interest rate risk in the banking book. Whitepaper interest rate risk in the banking book irrbb. In april 2016, the basel committee on banking supervision bcbs. Interest rate risk in the banking book how to manage. Without the prescriptive pillar i rules, irrbb practices have widely diverged across the industry. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Before these standards, the basel committee had issued guidance on interest rate risk management in their 2004 paper principles for the management and supervision of interest rate risk. Implementing bcbs 368 interest rate risk in the banking book. Its implementation is set as 1 january 2016, however, in june the basel committee for banking supervision bcbs published a consultative document cd on the interest rate risk in the banking book irrbb. Examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on.
Interest rate risk in the banking book zanders treasury. Sep 17, 2004 over the past 20 years, financial institutions have made significant efforts to establish and improve their procedures for interest rate risk management, including using economic models of interest rates and related models of credit risk lopez 2001a, b. Jun 07, 2019 examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on. This white paper focuses on understanding how current market conditions low interest. 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 is too dependent on the specific characteristics of institutions to enable a formalized capital requirement. Interest rate risk in the banking book irrbb bankinghub. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory. 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. Following the publication in june 2016 of the new standards on interest rate risk in the banking book irrbb by the basel committee on banking supervision, the deloitte emea irrbbalm working group invited european and south african banks to participate to an online survey to assess their current state of readiness against the new basel standards. But with the rules likely to arrive as rates start to be hiked, theres a lot riding on the project. Interest rate risk in the banking book irrbb november uk. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a bank s capital and to its earnings, arising from the impact of adverse movements in interest rates on its banking book. Marcel bluhm hkma interest rate risk in the banking book 27. 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 banking book masterclass bizenius. Whitepaper a summary of bcbs interest rate risk in the. The interest rate risk booklet applies to examinations of community banks. Interest rate risk in the banking book how to manage irrbb. Calculating interest rate risk in the banking book. This booklet provides an overview of interest rate risk comprising repricing risk, basis risk, yield curve risk, and options risk and discusses irr management practices.
However, the assets are valued at their book value and a write down in asset value happens only in case of defaults. Last april the basel committee issued its new standard on the interest rate risk in the banking book presenting a new standardized framework. 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. 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. Nov 28, 2016 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. Over the past 20 years, financial institutions have made significant efforts to establish and improve their procedures for interest rate risk management, including using economic models of interest rates and related models of credit risk lopez 2001a, b. Mar 26, 2020 the interest rate risk booklet applies to examinations of community banks. Standards on the interest risk in the banking book irrbb. This new standard addresses not only a banks irrbb disclosures but also the processes leading up to these revelations. This is known as interest rate risk in the banking book or irbb. A riskbased threshold called net interest profit nip is subtracted from minimum capital requirements associated with changes to eve and nii. Interest rate risk in the banking book, bank for international settlements. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018.
Oct 01, 2016 interest rate risk in banking book irrbb part ii good morning friends, welcome back, in this blog we will try to go through each of the principles mentioned in the recommendation, i have highlighted key words of each principle which will help you in case you want to get actually meaning of it. Implementing bcbs 368 interest rate risk in the banking book in switzerland your contacts at pwc andrea martin schnoz director, assurance andrea. 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 is currently part of the basel capital frameworks pillar 2. This began in june 2004 when the basel committee on banking supervision bcbs released the revised capital. 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. 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. Below this threshold, no capital is required for banking book earnings. 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. Guidelines on the management of interest rate risk arising. This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability.
Until 2014 paul was head of nontraded risk at lloyds banking group and prior to that held a. Differences between interest rate risk irr in the banking. Interest rate risk in the banking book irrbb march. 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. Interest rate risk in the banking book is the risk posed by adverse movements in.
Interest rate risk in the banking book irrbb june uk. Sensitivity analysis of irrbb stress test 2017 final. Here the banks typically accept credit risk and interest rate risk. Basel faces challenge on charge for interest rate risk in the. Following the publication in june 2016 of the new standards on interestrate risk in the bankingbook irrbb by the basel committee on banking supervision, the deloitte emea irrbbalm working group invited european and south african banks to participate to an online survey to assess their current state of readiness against the new basel standards. Guidelines on technical aspects of the management of interest. Video would be covering about regulatory of interest rate risk in banking books. Basel faces challenge on charge for interest rate risk in. What is interest rate risk in the banking book irrbb.
Frtb proposed that each risk factor should be assigned a liquidity horizon for. Supervising interest rate risk management san francisco fed. Guidelines on technical aspects of the management of. The guideline endorsed the guidance issued in 2004 by the basel committee on banking supervision bcbs through the principles for the management and supervision of interest rate risk. Interest rate risk in the banking book deloitte financial. The basel committee issued revised standards for interest rate risk in the banking book in april 2016 and in 2018 they will expect organisations to be compliant. Andreas dombret, member of board, deutsche bundesbank in. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. For an adequate management of interest rate risk, a removal of this risk to the first pillar of the basel accord is necessary figure 7. In april 2016, the basel committee on banking supervision bcbs issued final standards on irrbb that replace the 2004 principles for the management and supervision of interest rate risk. Bcbs proposals for interest rate risk in the banking book irrbb. The new basel committee on banking supervision bcbs standards for irrbb come into force.
The new standards set out the committees expectations on the management of irrbb in terms of. Interest rate risk in the banking book is the current or prospective risk, to both the groups capital and earnings, arising from movements in interest rates, which affect the groups banking book exposures. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. The bcbs updated its guidance in 2016 by issuing interest rate risk in the banking book irrbb. 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. 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 in the banking book irrbb presents significant challenges to all banks with respect to measurement, calculation, reporting and hedging of interest rate risk, as well as potential implications for pillar 2a capital requirement, and this. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and. 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. Rates expectations its no secret that bank regulators are looking to fill a gap in the capital framework by introducing a charge for interest rate risk in the banking book. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. The first day will look at the complexity of irrbb including sessions focusing on irr metrics, risk appetite and designing scenarios and sensitivity analysis. Jan 14, 2016 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 marcel bluhm. 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 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. Compliance with the basel committees standards on interestrate risk in the banking book bcbs 368 and eba final report july. Net interest income nii economic value of equity eve 2017 stress test. At the same time, bank supervisors worldwide, including the federal reserve, have been expanding their knowledge and oversight of interest. Hong kong monetary authority interest rate risk management. Standards for interest rate risk in the banking book. In face of the approaching deadline, interested and impacted parties have shared their comments on irrbb among which febelfin. Due to the heterogeneous nature of this risk, it is captured in pillar 2. Deutsche bank annual report 2017 nontrading market risk. Implementing bcbs 368 interest rate risk in the banking.
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