Pdf interest rate risk in the banking book irrbb levels for. An economic capital model integrating credit and interest rate risk in. Interest rate risk in the banking book advanced adis this prudential standard sets out the requirements that an authorised deposittaking institution with approval to use an internal model for interest rate risk in the banking book must meet for regulatory capital. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. This began in june 2004 when the basel committee on banking. 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. The standards revise the committees 2004 principles for the management and supervision of interest rate risk. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Consultations on revisions to the capital framework for. The view expressed by the basel committee in the basel ii capital. Introduction 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. Bcbs proposals for interest rate risk in the banking book irrbb.
Deutsche bank annual report 2017 nontrading market risk. However, the cashflows of these portfolios are subject to more risks than interest rate risk. 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. Interest rate risk is an integral part of banking business, and may even be a source of profit. 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. Basel committee on banking supervision consultative. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking.
Interest rate risk in the banking book irrbb 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. Frequently asked questions on market risk capital requirements 1 introduction in january 2016, the basel committee on banking supervision the committee published the standard minimum capital requirements for market risk. The minimum capital requirements are defined by three ratios. Irr in the trading book is subject to pillar i and hence carries a capital charge, whereas interest rate risk in the banking book.
This is known as interest rate risk in the banking book. Interest rate risk in the banking book aps 117 sets out apras requirements of authorised deposittaking institutions adis in relation to the management and measurement of interest rate risk in the banking book irrbb and the holding of regulatory capital against this risk. A firms record of its approach to evaluating and managing interest rate risk as it affects the firms nontrading activities should cover the following issues. 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. The basel committee on banking supervision bcbs has set up a task force on interest risk tfir with a mandate to allocate prudential capital to interest rate risk in the banking book. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Standards on the interest risk in the banking book irrbb. Pdf a cross section of 18 indian banks are surveyed to assess the interest rate risk levels reported by them in their basel ii pillar iii.
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. Whitepaper interest rate risk in the banking book irrbb. Overview interest rate risk in the banking book irrbb. Although the bcbs did not retain a minimum capital requirement mcr based on standardized measures following industry feedback, the. Interest rate risk is a bank s exposure to adverse movements in interest rates. Interest rate risk in the banking book marcel bluhm. Whitepaper implementing interest rate risk in the banking. 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. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. Implementing bcbs 368 interest rate risk in the banking. Interest rate risk in the banking book for authorised deposittaking institutions september 2019 pdf 591.
The temptation for full fair value is back with a first. The committee remains convinced that interest rate risk in the banking book is a potentially significant risk which merits support from capital basel ii, 762, basel. This includes gap risk, which arises from the term structure of banking book instruments, basis risk. Interest rate risk in the banking book irrbb is part of the basel capital. Interest rate risk in the banking book and capital. For the trading book, specific methodologies were proposed. Implementing bcbs 368 interest rate risk in the banking book in switzerland your contacts at pwc andrea martin schnoz director, assurance andrea.
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. European banking federation aisbl avenue des arts 56 b brussels. Interest rate risk in the banking book sara nooralicarlos santos1. This is referred to as interest rate risk in the banking book irrbb, since most of the risks to banking book revenues are driven by changes in interest rates. Introductionin general, banks financial situation is sensitive to fluctuations in market interest rates. 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. 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 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. Article interest rate risk in the banking book irrbb fis.
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. Interest rate risk on the banking book irrbb is defined as the current or perspective risk to the banks capital and earnings arising from adverse movements in. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1. 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. The management of interest rate risk is therefore critical to the stability of any banking. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn.
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. Apg 117 interest rate risk in the banking book advanced. As for the banking book, only in july 2004 the principles for the management and supervision of interest rate risk. 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. Guidelines on the management of interest rate risk arising. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk. Nii, on the other hand, is always based on cash flows at client rates. Until 2014 paul was head of nontraded risk at lloyds banking.
Interest rate risk in the banking book irrbb definition. What is interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb bankinghub. Interest rate risk on the banking book springerlink. 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. A particular definition was introduced related to the interest rate risk capital charge. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. Minimum capital requirements for interest rate risk in the banking book irrbb. Common equity tier 1 capital as a percentage of risk weighted assets tier 1 capital as a percentage of risk weighted assets total qualifying capital as a percentage of risk. This chapter focuses on generating cashflow forecasts for banking book business lines.
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