The interest rate risk in the banking book can be measured and controlled at present value or periodically. Interest rate risk in the banking book deloitte south africa. This booklet provides an overview of interest rate risk comprising repricing risk, basis risk, yield curve risk, and options risk and discusses irr management practices. Interest rate risk in the banking book irrbb bankinghub. Bcbs proposals for interest rate risk in the banking book irrbb. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Interest rate risk in the banking book irrbb definition. Srp98 application guidance on interest rate risk in the. 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 banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest. Overview 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. Pdf the new standard for interest rate risk in the banking book. Cembra money bank ag the bank, together with its subsidiaries.
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. 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. 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. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. Are banks ready for a return to a normal environment. Interest rate risk is a bank s exposure to adverse movements in interest rates. Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. Basel committee on banking supervision consultative. The requirement imposed on all banking corporations to allocate adequate capital against all the risks in their business, including interest rate risk, is dealt. This booklet applies to the occs supervision of national banks and federal savings associations. This is to make sure all needed are done and all that need to be done annually are done so. 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. When interest rates change, the present value and timing of future cash flows change.
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. Article interest rate risk in the banking book irrbb fis. Interest rate risk in the banking book and capital. 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. 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.
The clients business is mainly feedriven but, in order to ensure. Serge moulin almvision the new standard for interest rate risk in the banking book defined by the basel committee on banking supervision. 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. 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. Irrbb refers to the current or prospective risk to the bank s capital and earnings arising from adverse movements in interest rates that affect the bank s banking book positions. Guidelines on the management of interest rate risk arising from. The basel committee on banking supervision bcbs finalised its pillar 2 capital framework for interest rate. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. 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.
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. Interest rate risk in the banking book irrbb therefore reflects both the bank s fundamental business model and its assetliabilitymanagement alm strategy. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. Interest rate risk in the banking book how to manage. Whitepaper implementing interest rate risk in the banking.
Whitepaper interest rate risk in the banking book irrbb. Download it once and read it on your kindle device, pc, phones or tablets. The european entity offers a range of services focused on asset servicing mainly global custody and collateral management to international market participants. Interest rate risk in the banking book irrbb is currently part of the basel capital. How bcbs 368 will affect alm 3 distinction is useful from a management and 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 well as its supervision. Pdf interest rate risk in the banking book irrbb levels for. 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. 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. Until 2014 paul was head of nontraded risk at lloyds banking group and prior to that held a. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Interest rate risk management borrowing at a floating interest rate exposes borrowers to interest rate risk, which in a rising interest rate environment leads to higher debt servicing costs. Interest rate risk in the banking book interest rate risk in the banking book irrbb can be a significant risk for banking institutions and new regulations will have a significant impact on their risk management frameworks. Introductionin general, banks financial situation is sensitive to fluctuations in market interest rates.
This chapter considers behaviour and characteristics of net interest income nii and net interest margin nim, before moving on to key principles of interest. If a bank does an interest rate swap with a customer, thats trading book. The irrbb course provides a comprehensive overview the new standards presented in bcbs paper d368, the necessary mathematics required to construct zero curves, obtain discount factors and compute eve and nii and the interaction of banking book interest rate risk with other areas of regulation. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Interest rate risk and credit spread risk in the banking book. Implementing bcbs 368 interest rate risk in the banking book in. Does anyone know where i could find a list of required risk assessments for credit unions.
For the trading book, specific methodologies were proposed. 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. Interest rate risk in the banking book sara nooralicarlos santos1. Video would be covering about regulatory of interest rate risk in banking books. 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. What is the difference between a banking book and a. Standards on the interest 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. Basel committee interest rate risk in the banking book pdf file, 67. Hong kong monetary authority interest rate risk management. Guidelines on the management of interest rate risk arising. 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. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift of a.
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. Implementing bcbs 368 interest rate risk in the banking. The bank s mpc had been expected to raise interest rates in may, but held fire because the economy went through a weak patch at the start of the year partly because of the harsh weather. This context has led regulators to focus more closely on the interest rate risk in the banking book. 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 treatment of automatic options under the standardized approach brings. I am trying to get all that i know of current, but would like list of required annual assessments. Use features like bookmarks, note taking and highlighting while reading interest rate risk in the banking book. Interest rate risk in the banking book pdf file, 739. 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. As for the banking book, only in july 2004 the principles for the management and supervision of interest rate risk provided some guidance on how to evaluate its interest rate risk. As the reference rate changes over time, borrowers who pay floating interest rates will see their interest payments fluctuate depending on market conditions. The precise answer is both complex and involves considerable latitude for opinion. Following the publication in april 2016 of the new standards on interest rate risk in the banking book irrbb by the basel committee on banking supervision bcbs, deloitte invited european and south african banks to participate in an online survey to assess their current state of readiness against the new basel standards. Interest rate risk in the banking book kindle edition by newson, paul.
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