We cover some of the ways in which liquidity risk may be stress tested under the internal capital adequacy and assessment process icaap. It is the most obvious source of interest rate risk for an ai. What is interest rate risk in the banking book irrbb. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. 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 rates that affect banking book positions. Interest rate risk in banking book irrbb refers to the current or prospective risk to.
The list of abbreviations related to irrbb interest rate risk in the banking book. Ss3115 the internal capital adequacy assessment process. 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. 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.
Andreas dombret, member of board, deutsche bundesbank in. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb definition. The paper sets out supervisory expectations regarding the measurement, management and governance arrangements of irrbb and its reflection in the icaap. 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. Guidelines on the internal capital adequacy assessment. Interest rate risk in the banking bookresponses of participating banks were collected on an individual basis through an online survey3 and then combined in order to produce a consolidated view4. 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. Process icaap approved by the governing body, in line with the banks risk. Its aim is to identify earnings volatility over a 12monthhorizon against the two. Any changes in interest rates have an impact on the present value of future cash flows on the bank.
Refer to osfis internal capital adequacy assessment process icaap for. Whitepaper implementing interest rate risk in the banking. A var models estimates should be sensitive to changes in the trading book risk profile. Basis risk, which relates to the impact of rela tive changes in interest. 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 extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk. Internal capital adequacy assessment process icaap for. 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. If you have 3 or more participants, it may be cost effective to have this course presented inhouse via live webinar for you. 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 irrbb bankinghub.
Interest rate risk and credit spread risk in the banking book. 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 requirements directive directive. Rbi invites feedbackcomments on the draft guidelines. Guidelines on technical aspects of the management of. 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. These guidelines set out highlevel guidance, addressed to both credit institutions and investment firms, related to interest rate risk arising from nontrading activities irrbb. Ir1 interest rate risk managementin the banking book tion.
These involve simple sensitivity analysis techniques, such as applying liquidity and interest rate shocks to the assets and liabilities of the bank. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Implementing bcbs 368 interest rate risk in the banking. 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. 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. The european entity offers a range of services focused on asset servicing mainly global custody and collateral management to international market participants. Deutsche bank annual report 2017 nontrading market risk. 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. Standards on the interest risk in the banking book irrbb. 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. 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. The framework under which an institution should develop its icaap is designed to be riskbased and emphasises the importance of capital planning, but also. 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.
Ir1 interest rate risk managementin the banking book v. Interest rate risk in the banking book irrbb march. 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 panel of participating banks was a balanced mix of significant entities under ecb.
Fx lending risk, country risk, credit concentration risk, migration risk market risk also including. The interest rate risk in banking book refers to the risk to a banks capital 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. Pra supervisory statement 3115 the internal capital. This includes gap risk, which arises from the term structure of banking book instruments, basis risk, which describes the impact of. The guidance note is consistent with the standards on irrbb as published in april 2016 by the basel committee on banking supervision bcbs. There are new rules for an appropriate assessment of the interestrate risk of new products in the banking book e. Implementing bcbs 368 interest rate risk in the banking book in switzerland your contacts at pwc andrea martin schnoz director, assurance andrea. Icaap approved by the governing body, in line with the banks risk. 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 refers to the current or. Nigeria for measuring, managing, monitoring and controlling interest rate risk in the banking book irrbb, as part of their internal capital adequacy assessment process icaap. 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. 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.
It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. The interest rate risk in the banking book can be measured and controlled at present value or periodically. 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 reserve bank of india has today placed on its website the draft guidelines on interest rate risk in banking book. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Interest rate risk in the banking book irrbb is currently part of the basel capital. 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. The irrbb was instigated by the white paper produced by the bank for international. Guidelines on the management of interest rate risk arising. The icaap considers all risks faced by the bank, mainly. The icaap should include all material interest rate risk positions of the institution and consider all relevant repricing and maturity data. The clients business is mainly feedriven but, in order to ensure.
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. The feedbackcomments on the proposals contained in this document may be sent to the following address by march 3, 2017 electronic submission is encouraged. Internal capital adequacy assessment process icaap. Interestrate risk in the banking book irrbb regtech.
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