Interest rate risk in the banking book irrbb masterclass. Excessive levels of interest rate risks in the banking book can pose a significant threat to an institutions earnings and capital base. Such positions include those related to interest rate, exchange rate, equity. Accepting this risk is a normal part of banking and can be an important source of pro.
Market risk, counterparty credit risk net interest income conduct risk and other operational risks noninterest income, expenses and capital amongst which. 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 basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. 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 the banks banking book positions. 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. 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 seminal guide to risk management, streamlined and updated.
In april 2016, bcbs issued standards for interest rate risk in the banking book. 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. 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 banking book is a term for assets on a banks balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. The foremost among the challenges faced by the banking sector today is the challenge of understanding and managing the risk.
Foreign exchange risk throughout the banking corporation. The management of interest rate risk is therefore critical to the stability of any banking corporation. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift of a yield curve in particular maturity segments. The very nature of the banking business is having the threat of risk imbibed in it. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. Following the publication in april 2016 of the new standards on interest rate risk in the banking book irrbb by the basel committee on banking supervision bcbs, deloitte invited european and south african banks to participate in an online survey to assess their current state of readiness against the new basel standards. May 12, 2020 the banking book is a term for assets on a banks balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. This creates interest rate risk, which, in the case of banks, is the risk that interest rates will rise, causing the bank to pay more for its liabilities, and, thus, reducing its profits. Irrbb partially captured via net interest income multiple. Scope of application of market risk ault it ad t risk isk t ind fx ities banking no look through. Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. The approach then uses a range of stress scenario in order to measure the earnings at risk 6. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off.
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. Interest rate risk is an integral part of banking business, and may even be a source of profit. Book banking book trading book risk credit risk general irr delta csr1 default risk total 12. 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. 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. 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.
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 new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. 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. 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. Whitepaper interest rate risk in the banking book irrbb. The interest rate risk in the banking book can be measured and controlled at present value or periodically.
The tradeoff between delta eve and delta nii by philip j. For example, if rates were to increase and a banks deposits repriced sooner than its loans. 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. 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. Measurement and capital adequacy market risk page 2081. Interest rate risk in the banking book irrbb bankinghub. Therefore, the focus is on the impact of the change of the interest rate level on the present value of an institutions assets and liabilities. At the same time, bank supervisors worldwide, including the federal reserve, have been expanding their knowledge and oversight of interest. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift. Implementing interest rate risk in the banking book irrbb.
Rationale market risk means the risk of losses to financial institutions positions in the trading book and banking book that may arise from market price volatility. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Now in its fourth edition, this useful guide has been updated with the latest information on alm, basel 3, derivatives, liquidity analysis, market risk, structured products, credit risk, securitizations, and. 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. Risk management in banking is a comprehensive reference for the risk management industry, covering all aspects of the field. 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. In the alternative scenario, the interest rate and spread shifts are added onto the forward rates used in the base scenario. 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. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking institutions.
Interest rate risk in the banking book marcus evans. Risk analysis and risk management has got much importance in the indian economy during this liberalization period. Unofficial translation this translation is for the. Regulation 30 directives and interpretations for completion of. At worst, there could be an opportunity loss, but always. 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. Any changes in interest rates have an impact on the present value of future cash flows on the bank. 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. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios. The webinar was attended by 285 industry professionals, and below. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. Nov 11, 2016 irrbb interest rate risk in the banking book 1. The capital charges for interest raterelated instruments and equities will apply to the current trading book items prudently valued by banking. Sensitivity analysis of irrbb stress test 2017 final.
Interest rate risk in the banking book irrbb definition. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. Market risk, counterparty credit risk net interest income conduct risk and other operational risks non interest income, expenses and capital amongst which. General interest rate risk girr each currency tenor 0. 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 paper looks at the standards from a practical implementation point of view and raises some of the main challenges.
Jun 29, 2015 risk management in banking is a comprehensive reference for the risk management industry, covering all aspects of the field. Standards on the interest risk in the banking book irrbb. Whitepaper implementing interest rate risk in the banking. 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. What is interest rate risk in the banking book irrbb. 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. 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. Therefore, the focus is on the impact of the change of the interest rate level. 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. Now in its fourth edition, this useful guide has been updated with the latest information on alm, basel 3, derivatives, liquidity analysis, market risk, structured products, credit risk, securitizations, and more. Jul 20, 2016 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. More importantly, the fact that credit spreads play an. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. The low interest rate environment has made interest rate in the banking book irrbb an interesting topic.
In may 2015, the european banking authority eba published an update to the guidelines for managing 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. Mar 28, 2012 interest rate risk in the banking book understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book event start date. 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. 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. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. 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. When interest rates change, the present value and timing of future cash flows change. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices. Interest rate risk in the banking book deloitte south africa. Sensitivity analysis of irrbb stress test 2017 final results. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. 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. The bank of spain has authorized the use of the internal model for measuring price risk for the purposes of calculating own funds requirements, commodity positions andor exchange rate and gold risk in trading book activities held by the group in its operations in spain and mexico.
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