Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. Interest rate risk in the banking book over the past decade the basel committee on banking supervision the basel committee has released a number of consultative documents discussing the management and supervision of the interest rate risk inherent in a banks balance sheet 1. The bank of england and pra are preparing to publish regular, aggregated data relating to the uk insurance market on a quarterly basis. Rbi releases draft guidelines on interest rate risk in banking book. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk. By analysing the balance sheet of a small italian bank during the years 2009 and 2010, we outlined its liquidity. 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. Guidelines on the management of interest rate risk arising from. Brochure report title goes here section title goes here. The principles suggest supervisory guidelines for assessing the adequacy of interest rate risk management systems, such as focusing on banks internal control functions and stresstesting results.
Guidelines on technical aspects of the management of. 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. 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. 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. 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. The immediate impact of changes in interest rates is on the net. Knowledgebank from interest rates and inflation through to.
An analysis of commercial bank exposure to interest rate risk. Huseyin gursah joined prometeia in 2014 working as a senior manager after spending more than 7 years in the international banking sector. Interest rate risk in the banking book irrbb definition. 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 has the potential to create adverse effects on the financial results and capital of the bank arising from positions in the banking book. Srp98 application guidance on interest rate risk in the. He joined from ey where he was a manager in the advisory practice specialising in treasury and alm, and previously spent over five years in the alm function at lloyds banking group. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off.
Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. The comments are due by december 23, 2017, with an effective date of january 01, 2019. The pras methodologies for setting pillar 2 capital bank. Thomas has a keen interest in education, coaching, and training. Interest rate risk management of commercial banks in. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. This risk arises primarily from loans, deposits, liquid assets and tradeable instruments used to hedge banking book exposures. The feedbackcomments on the proposals contained in this document may be sent to the following address. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. The reserve bank of india has today placed on its website the draft guidelines on interest rate risk in banking book. Interest rate risk exists in an interestbearing asset, such as a loan or a bond, due to the possibility of a change in the assets value resulting from the variability of interest rates.
The pra s methodologies for setting pillar 2 capital. Principles for the management and supervision of interest rate risk henceforth, the irr principles. Interest rate risk in the banking book faq 7 whilst allowing firms to strike a compromise between net interest income sensitivity and economic value sensitivity that cannot be simultaneously cancelled out. 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. 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. Department of banking regulation reserve bank of india, central office mumbai 400 001.
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. Pra regulatory digest september 2018 bank of england. 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. Interest rate risk in the nontrading book may arise from a number of sources for. The comments are due by december 23, 2017, with an. Video would be covering about regulatory of interest rate risk in banking books. The pras methodologies for setting pillar 2 capital bank of england. This topic also provides specific guidance on interest rate risk, which is the exposure of a banks current and future earnings and capital arising from adverse movements in interest rates, and the market risk capital rule, which establishes regulatory capital requirements for bank holding companies and state member banks with significant. Template irrbb1 provides quantitative irrbb information, including the impact of interest rate shocks on their change in economic value of equity and net interest income, computed based on a set of prescribed interest rate shock scenarios.
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. Interest rate risk in the banking book irrbb bankinghub. The committees most recent release on this topic forms part of the proposed new basel capital accord. Pra basel iiiiv, crd ivv, icaap, ilaap, rrp assistance. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Prudential regulation authority pra discussion papers, consultation. This topic also provides specific guidance on interestrate risk, which is the exposure of a banks current and future earnings and capital arising from adverse movements in interest rates, and the market risk capital rule, which establishes regulatory capital requirements for bank holding companies and state member banks with significant. 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 is the exposure of a banks current or future earnings and capital to adverse changes in market interest rates. Interest rate risk in the banking book irrbb june uk finance. Interest rate risk irr is defined as the change in a banks portfolio value due to interest rate fluctuations. Whitepaper implementing interest rate risk in the banking. Longevity risk transfers simplification of pre notification expectations. 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. 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 that affect. Interest rate risk an overview sciencedirect topics.
Guidelines on the management of interest rate risk arising. 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. This risk is a normal part of banking and can be an important source of profitability and shareholder value. 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. Interest rate risk management latest about banking.
Registrant may not transfer or assign this contract or any interest in it without the prior written consent of marcus evans. Sensitivity analysis of irrbb ecb banking supervision. Pra supervisors will discuss with major firms how they will address the modelling challenges that the libor transition poses to counterparty credit risk, market risk and interest rate risk in the banking book irrbb and will expect analysis to be included in future. Interest rate risk in the banking book irrbb best practice. At worst, there could be an opportunity loss, but always. However, excessive interest rate risk can pose a significant threat to a banks earnings and capital base. Rajesh kumar, in strategies of banks and other financial institutions, 2014.
Cbrc consults on revised irrbb guidelines for banks. Standards on the interest risk in the banking book irrbb. Agenda interest rate risk management strategies and. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. He heads up the second line of defence in the areas of interest rate risk, liquidity risk, and fx. Compliance with the basel committees standards on interestrate risk in the banking book bcbs 368 presents significant challenges to all banks with respect to measurement, calculation and hedging of interest rate risk, and this whole area is the subject. Pra supervisors will discuss with major firms how they will address the modelling challenges that the libor transition poses to counterparty credit risk, market risk and interest rate risk in the banking book irrbb and will expect analysis to be included in future internal capital adequacy assessment process icaap. 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. 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. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. Dec 11, 2019 compliance with the basel committees standards on interestrate risk in the banking book bcbs 368 presents significant challenges to all banks with respect to measurement, calculation and hedging of interest rate risk, and this whole area is the subject of intense focus from the regulatory authorities. Pra decision on systemic risk buffer rates pra decision on systemic risk buffer rates. Knowledgebank from interest rates and inflation through to bank failures and financial crises. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a banks capital and.
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 sets out the methodologies we 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 hereafter referred to as interest rate risk in the banking book irrbb, pension. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn to capital arising from. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk or differentially by period nonparallel risk. 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. Agenda interest rate risk management strategies and irrbb. Cbrc is consulting on the revised guidelines for interest rate risk in the banking book irrbb for commercial banks. This article evaluates some of the factors that may be affecting the level of interest rate risk among commercial banks and estimates the general magnitude and signi. Irrbb consultative paper on interest rate risk in the.
Pra regulatory digest january 2020 bank of england. 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. Guidelines on technical aspects of the management of interest. It also contains the pra s final policy in an updated version of ss1816 solvency ii. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016.
Investors need to know which ones will best serve their needs in todays dynamic bond market. The pras methodologies for setting pillar 2 capital. Mar 28, 2012 interest rate risk in the banking book. He has longterm experience in retail, corporate and investment banking, and expertise in financial risk management in the area of asset and liability management, market risk management, treasury risk and financial control. 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. Whitepaper interest rate risk in the banking book irrbb. The regulatory restrictions in the past had greatly reduced many of the risks in the banking system. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. Interest rate risk is the risk to current or anticipated earnings or capital arising from movements in interest rates. Deregulation of interest rates has, however, exposed them to the adverse impacts of interest rate risk. Table irrbba provides information on a bank s irrbb risk management objective and policy. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
Letter from sarah breeden and david bailey removal of bespoke liquidity risk appetite pra annual conference for ceos of the nonsystemic uk bank and building societies. This pra ps provides feedback to responses to cp319 solvency ii. Interest rate risk is the exposure of a banks financial condition to adverse movements in interest rates. The book is essential reading for all those involved with interest rate risk in the banking book but particularly those working in a bank alm function who wish to gain a wider appreciation of the context in which they operate, more generalist and senior bankers who need a grasp of the fundamentals and those working in a trading risk function. Rbi invites feedbackcomments on the draft guidelines. Basis risk, which relates to the impact of rela tive changes in interest. 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. Gap risk, which arises from the term structure of banking book instruments resulting in rate changes impacting instruments at different times. 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.
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