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. 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. Regulation 30 directives and interpretations for completion of monthly return concerning interestrate risk form. The foremost among the challenges faced by the banking sector today is the challenge of understanding and managing the risk. Interest rate risk management latest about banking. The very nature of the banking business is having the threat of risk imbibed in it. Risk analysis and risk management has got much importance in the indian economy during this liberalization period. Whitepaper 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 banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. We do this by creating a model that reallocates the exposures to balance sheet items.
Interest rate risk is an integral part of banking business, and may even be a source of profit. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift. 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 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 management of interest rate risk is therefore critical to the stability of any banking corporation.
Interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. 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. Within germany, savings banks and cooperative banks are particularly engaged. This book reveals how more than three dozen experts control and preserve the value of their own fixed income portfoliosfrom choosing the right risk management product to monitoring and evaluating the effectiveness of hedge management strategies. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. 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 risk includes foreign currency risk, which is defined as the actual or potential risk that affects results or capital as a result of adverse changes in exchange rates in the banking book. Gonzalez are grateful for the financial support from. 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. Pdf interest rate risk and bankspecific characteristics. The new basel committee on banking supervision bcbs standards for irrbb come into force. In april 2016, bcbs issued standards for interest rate risk in the banking book. 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 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. If a bank solely minimises its economic value risk by matching the repricing of its assets with liabilities beyond the short term, it could run the risk of earnings. 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. 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. 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. Changes in interest rate affect earnings, value of assets, liability, offbalance sheet items and cash flow. Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition. 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 bank s balance sheet1. The treatment of automatic options under the standardized approach brings. Interest rate risk in the banking book irrbb bankinghub. Interest rate risk in the banking book how to manage.
In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book 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. 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. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Nov 11, 2016 irrbb interest rate risk in the banking book 1. 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.
Irrbb interest rate risk in the banking book slideshare. This white paper focuses on understanding how current market conditions low interest. Implementing interest rate risk in the banking book irrbb. 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 committees most recent release on this topic forms part of the proposed new basel capital accord the new. If interest rates rise, the cost of funds increases more rapidly than the yield on assets, thereby reducing net income. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Sep 08, 2010 interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates.
We do this by creating a model that reallocates the exposures to. The impact of interest rate risktaking on a banks profitability. Any changes in interest rates have an impact on the present value of future cash flows on the bank. The low interest rate environment has made interest rate in the banking book irrbb an interesting topic. Interest rate risk management at community banks community. Eba and the basel committee reacted to the current low interest environment with new or further detailed requirements for banks dealing with. Interest rate risk in the banking book how to manage irrbb. 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. Andreas dombret, member of board, deutsche bundesbank in. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. 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. Interest rate risk in the banking book irrbb definition. Second, supervisory interest rate shock scenarios are found to be.
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. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. T he management of interest rate risk should be one of the critical components of market risk management in banks. The interest rate risk in the banking book can be measured and controlled at present value or periodically. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. 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. Therefore, the focus is on the impact of the change of the interest rate level. Investors need to know which ones will best serve their needs in todays dynamic bond market. First, the interest rate risk from onbalance sheet term trans formation of banks in germany exceeds the euro area average and is bound to increase even further. While interest rate risk can arise from various sources, four key types of interest rate risk are common to community bank balance sheets. When interest rates change, the present value and timing of future cash flows change. The risk that assets and liabilities reprice or mature at different times, causing margins between interest income and interest expense to narrow.
Recall that the interest rate risk on the banking book are within pillar 2 and as such they are not linked to banks capital requirements. Whitepaper implementing interest rate risk in the banking. This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. The basel comittee on banking supervision bcbs made new guidelines for regulations available in april 2016. More importantly, the fact that credit spreads play an. Article interest rate risk in the banking book irrbb fis.
Interest rate risk is the exposure of a banks financial condition to adverse movements in interest rates. The webinar was attended by 285 industry professionals, and below. 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. 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.
Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. 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. 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. If passages have been quoted from the original, credits have been given. However, excessive interest rate risk can pose a significant threat to a banks earnings and capital base. May 14, 2010 interest rate risk explained the amount at risk is a function of the magnitude and direction of interest rate changes and the size and maturity structure of the mismatch position. This impacts the underlying value of the bank s assets. The tradeoff between delta eve and delta nii by philip j. At worst, there could be an opportunity loss, but always. Standards on the interest risk in the banking book irrbb. If interest rates rise, the cost of funds increases more rapidly than. 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.
Regulation 30 directives and interpretations for completion of. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. 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. 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. We examine the impact of a banks interest rate risk appetite on its return on equity, as well as give insight in the impact of a direct capital charge for irrbb. Interest rate risk management of commercial banks in. Interest rate risk explained the amount at risk is a function of the magnitude and direction of interest rate changes and the size and maturity structure of the mismatch position. In april 2016, the basel committee on banking supervision bcbs issued final standards on. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. 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. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. Accepting this risk is a normal part of banking and can be an important source of pro. 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.
Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. 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. If a bank minimises its eve risk by matching the repricing of its assets with liabilities beyond the short term, it runs the risk of earnings volatility. 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. Draft guidelines on governance, measurement, and management of interest rate risk in banking book statement on development and regulatory policies by rbi dated october 4, 2016 available from website.
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