Interest rate risk of the banking book issued by bis committee aaaa antonio castagna i n 2004 the interest rate risk of the banking book irrbb came for the. 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. 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. What is the difference between a banking book and a. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse. Interest rate risk irr is defined as the change in a banks portfolio value due to interest rate fluctuations. Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed rate investment. If a bank does an interest rate swap with a customer, thats trading book. Meeting the practical challenges moodys analytics and second, even if internal models were allowed in pillar 1, the constraints on their calibration would be too restrictive or lead to inconsistent results in scenarios involving shocked interest rates. Vice president, interest rate risk in the banking book, business support and analysis team team. In april 2016, the basel committee on banking supervision issued interest rate risk in the banking book standards, which revise the 2004 principles for the management and supervision of interest rate risk. Interest rate risk in the banking book irrbb refers to the current or prospective risk to a banks capital and to its earnings, arising from the impact.
Application guidance on interest rate risk in the banking book bis. Sep 17, 2004 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. Latest interest rate risk in the banking book irrbb articles on risk management, derivatives and complex finance interest rate risk in the banking book irrbb news and analysis articles home. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. The way ahead executive summary 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. Banks provide their views on the regulators proposals to add interest rate risk in the banking book irrbb to the calculation of banks pillar 1 minimum capital requirements 1. Final bcbs standards on interest rate risk in the banking. This course covers the nature and functions of money. The international standards do not apply to community banks. Whitepaper implementing interest rate risk in the banking.
The interest rate risk booklet applies to examinations of community banks. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Implementing bcbs 368 interest rate risk in the banking book in. Download it once and read it on your kindle device, pc, phones or tablets. 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. 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. Table irrbba interest rate risk in the banking book irrbb risk management objective and policies. What is the difference between a banking book and a trading. 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. Objective of the course interest rate risk in banking book irrbb objective of the course. These standards apply to internationallyactive institutions. 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. Interest rate risk in the banking book irrbb news and.
The irr team is responsible for measuring, reporting and managing interest rate risk in the banking book. Interest rate risk in the banking book is too dependent on the specific characteristics of institutions to enable a formalized capital requirement. 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 in the banking book irrbb therefore reflects both the bank s fundamental business model and its assetliabilitymanagement alm strategy. 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. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. 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.
Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Interest rate risk in the banking book zanders treasury. Analysis of the new standards to measure and manage the. 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. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. Interest rate risk in the banking book deloitte financial. 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. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates.
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. 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. Standards for interest rate risk in the banking book. The individual will work in interest rate risk irr team within citis corporate treasury. Apg 117 interest rate risk in the banking book advanced. As interest rates rise bond prices fall, and vice versa. 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.
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. Use features like bookmarks, note taking and highlighting while reading interest rate risk in the banking book. Differences between interest rate risk irr in the banking. Quantification of interest rate risk in the bank book through analysis of nim and eve. 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 for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016. Learn more about applying for vice president, interest rate risk in the banking book, business support and analysis team at citi. 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. 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.
Topics include a survey of the operation and development of the banking system in the u. Vice president, interest rate risk in the banking book, business support and analysis team team the individual will work in interest rate risk irr team within citis corporate treasury. 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. As it can account for new business, it reflects a full goingconcern perspective. Interest rate risk in the banking book irrbb bankinghub. 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. Unofficial translation this translation is for the.
Interest rate risk in the banking book risk library. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Preparation and elaboration of fancharts for the bank s global liquidity indicator forecasting and the factors of its calculation. Inspired by the fed, the ecb launched a similar exercise in march 2015 which had similar effects on interest rates. Interest rate risk in the banking book how to manage irrbb considering the monetary policy and the new regulation. Us banks leverage soared in q1 before feds reprieve. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. 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. While we are currently still in the process of finalising the policy documents for the local implementation of the standards interest rate risk in the banking book on irrbb issued by the basel committee on banking supervision bcbs 1. Latest interest rate risk in the banking book irrbb articles on risk management, derivatives and complex finance. Bcbs standard for interest rate risk in the banking book objectives, approaches and disclosure meeting on irrbb and the revised standardised approach for credit risk sao paulo, brazil 2728 april 2016 jeff miller fsi connect relationship manager financial stability institute. The new framework replaces its previous version from 2004 and sets out nine principles for banks and three principles for supervisors for the management and supervision of irrbb. First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. Interest rate risk in the banking book means losses to earnings andor economic value of financial institutions as a result of change in interest rate which may arise from both on and offbalance sheet positions in the banking book.
Irrbb overview interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Jun 07, 2017 the precise answer is both complex and involves considerable latitude for opinion. Interest rate risk in the banking book irrbb refers to 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 in the banking book irrbb more specifically refers to the current or prospective risk to the banks capital and earnings arising from adverse. Interest rate risk in the banking book kindle edition by newson, paul. 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. Banks reject nmd maturity limits in interest rate risk rules. Implementing bcbs 368 interest rate risk in the banking. I am writing to inform you that, following a comprehensive consultation process with the industry associations, the monetary authority is issuing today a revised version of the supervisory policy manual spm ir1 with an updated. 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. Both papers combined will have a significant impact on how banks measure, monitor, hedge and manage their interest rate risk. An earningsbased measure analyses the interest rate risk profile of the banking book in a detailed way tailored to the bank s specific circumstances.
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. Interest rate risk in the banking book chappuis halder. 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. Nov 07, 2019 interest rate risk exists in an interest bearing 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. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest rates that affect banking book positions.
Guidelines on technical aspects of the management of interest. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Bcbs standard for interest rate risk in the banking book. 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. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. The interest rate risk in the banking book webinar emphazises the importance of this risk category in the alm management. Whitepaper interest rate risk in the banking book irrbb. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury.
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. 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. 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 precise answer is both complex and involves considerable latitude for opinion. Banks exposure to interest rate risk is small on aggregate, but heterogeneous in the crosssection.
Camilo camargo interest rate risk in the banking book. Interest rate risk in the banking book irrbb definition. Department of banking regulation reserve bank of india, central office mumbai 400 001. Details of types and interest rate risk impacts are in attachment 1. Two risk management metrics ecbpublic the two metrics are discussed in detail in the eba guidelines on the management of interest rate risk arising from nontrading activities and in the bcbs standards on irrbb. 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 it is receiving from loans. Table irrbba provides information on a bank s irrbb risk management objective and policy. Standards on the interest risk in the banking book irrbb. What is interest rate risk in the banking book irrbb. Guidelines on the management of interest rate risk arising. We study the allocation of interest rate risk within the european banking sector using novel data. Definition of interest rate risk in the banking book. This risk arises primarily from loans, deposits, liquid assets and tradeable instruments used to hedge banking book exposures.
Sensitivity analysis of irrbb ecb banking supervision. Video would be covering about regulatory of interest rate risk in banking books. 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, to take effect from 31 december 2017, sets out pillar 2 requirements for the identification, measurement, monitoring and control of irrbb, and disclosure requirements under prescribed interest rate shock scenarios. Bcbs proposals for interest rate risk in the banking book irrbb. Deutsche bank annual report 2017 nontrading market risk. The interest rate risk in the banking book can be measured and controlled at present value or periodically. 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. 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.
Stress scenario models for interest rate risk in the banking book sensitization. Stress test 2017 final results ecb banking supervision. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. Vice president, interest rate risk in the banking book.