The bcbs updated its guidance in 2016 by issuing interest rate risk in the banking book irrbb. In 2018 new basel standards were introduced for measuring and managing interest rate risk on the banking book irrbb. Interest rate risk in the banking book of april 2016 irrbb1. 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. Implementing bcbs 368 interest rate risk in the banking. Interest rate risk in banking book masterclass bizenius. Last april the basel committee issued its new standard on the interest rate risk in the banking book presenting a new standardized framework.
Basel iv revised trading and banking book boundary for market. 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. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Its aim is to identify earnings volatility over a 12monthhorizon against the two.
Video would be covering about regulatory of interest rate risk in banking books. 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 movements in interest rates affect the institutions banking book that positions. Implementing bcbs 368 interest rate risk in the banking book in switzerland your contacts at pwc andrea martin schnoz director, assurance andrea. 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. Standards for interest rate risk in the banking book. Mar 26, 2020 the interest rate risk booklet applies to examinations of community banks. With its principles for the management and supervision of interest rate risk bcbs 108, the basel committee on banking supervision bcbs addressed interest. Marcel bluhm hkma interest rate risk in the banking book 27 27. The new standards set out the committees expectations on the management of irrbb in terms of. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below. Interest rate risk in the banking book how to manage irrbb. 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. Over the past 20 years, financial institutions have made significant efforts to establish and improve their procedures for interest rate risk management, including using economic models of interest rates and related models of credit risk lopez 2001a, b.
This is known as interest rate risk in the banking book or irbb. Circular 20192 interest rate risk banks amended 20. Interest rate risk in the banking book irrbb june uk. Standards on the interest risk in the banking book irrbb. This new standard addresses not only a banks irrbb disclosures but also the processes leading up to these revelations. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
Home submissions interest rate risk in the banking book 16 december 2019 the aba supports the alignment of aps 117 with the basel committee on banking supervision interest rate risk in the banking book issued april 2016 where appropriate. Guidelines on the management of interest rate risk arising from nontrading book activities 5 instruments, including gap risk, basis risk and option risk. Interest rate risk in the banking book irrbb march. The final standard details twelve principles for the management, control, and supervision of irrbb, based on pillar 2 of basel iii. Compliance with the basel committees standards on interestrate risk in the banking book bcbs 368 and eba final report july. The interest rate risk booklet applies to examinations of community banks. Basel iii pillar 3 personal banking including accounts. Interest rate risk in the banking book irrbb bankinghub. Guidelines on technical aspects of the management of interest. 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. Revised trading and banking book boundary for market risk 19 fig. Whitepaper interest rate risk in the banking book irrbb. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and. 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 new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. Interest rate risk in the banking book zanders treasury. Interest rate risk in the banking book deloitte south africa. Here the banks typically accept credit risk and interest rate risk. For fx and commodity positions in the banking book, the actual.
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. This began in june 2004 when the basel committee on banking supervision bcbs released the revised capital. The banking book is a term for assets on a banks balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. Interest rate sensitive instruments assets, liabilities and offbalancesheet items in the nontrading book, excluding assets deducted from cet1 capital, e. Whitepaper a summary of bcbs interest rate risk in the. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. 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. Guidelines on technical aspects of the management of. 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. Interest rate risk in the banking book irrbb is part of the basel capital framework under pillar 2 and principles for the management and supervision of interest rate risk were set out in 2004 by the bcbs. The basel committee on banking supervision bcbs finalised its pillar 2 capital framework for interest rate. Interest rate risk in the banking book marcel bluhm.
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. Andreas dombret, member of board, deutsche bundesbank in. In april 2016, the basel committee on banking supervision published the final standard on capital framework for interest rate risk in the banking book irrbb. In april 2016, bcbs issued standards for interest rate risk in the banking book. The basel committee issued revised standards for interest rate risk in the banking book in april 2016 and in 2018 they will expect organisations to be compliant. Basel committee on banking supervision consultative document. Interest rate risk in the banking book irrbb definition. Basic considerations irrbb8 interest rate risk in the banking book 2 shall be the risk to the banks capital and earnings arising.
May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Interest rate risk in the banking book irrbb june uk finance. A summary of bcbs interest rate risk in the banking book. However, from an earnings point of view, there cannot be an interest rate loss from investing equity in fixed rate. Guidelines on the management of interest rate risk arising. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Marcel bluhm hkma interest rate risk in the banking book 27. In face of the approaching deadline, interested and impacted parties have shared their comments on irrbb among which febelfin. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii.
Implementing bcbs 368 interest rate risk in the banking book. 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. Deutsche bank annual report 2017 nontrading market risk. However, the assets are valued at their book value and a write down in asset value happens only in case of defaults. Interest rate and rate of return risk in the banking book regulation. The guideline endorsed the guidance issued in 2004 by the basel committee on banking supervision bcbs through the principles for the management and supervision of interest rate risk.
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. Interest rate risk in the banking book, bank for international settlements. In 2018 new basel standards were introduced for measuring and managing interest rate risk on. Basel committee on banking supervision consultative. 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. Without the prescriptive pillar i rules, irrbb practices have widely diverged across the industry. Before these standards, the basel committee had issued guidance on interest rate risk management in their 2004 paper principles for the management and supervision of interest rate risk the new standards are expected to replace this old guidance. 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. Differences between interest rate risk irr in the banking. 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. Its implementation is set as 1 january 2016, however, in june the basel committee for banking supervision bcbs published a consultative document cd on the interest rate risk in the banking book irrbb. Due to the heterogeneous nature of this risk, it is captured in pillar 2. Interestrate risk in the banking book irrbb regtech.
Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. This white paper focuses on understanding how current market conditions low interest. 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 movements in interest rates affect the. 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 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. 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. Uae basel iiguidelines for banks corporate governance guidelines. At the same time, bank supervisors worldwide, including the federal reserve, have been expanding their knowledge and oversight of interest.
Interest rate risk in the banking book is too dependent on the specific characteristics of institutions to enable a formalized capital requirement. 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. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Bcbs proposals for interest rate risk in the banking book irrbb. In april 2016, the basel committee on banking supervision bcbs issued final standards on. What is interest rate risk in the banking book irrbb. Before these standards, the basel committee had issued guidance on interest rate risk management in their 2004 paper principles for the management and supervision of interest rate risk. Calculating interest rate risk in the banking book. This chapter describes requirements on assessing interest rate risk in the banking book, ie 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. The interest rate risk in the banking book can be measured and controlled at present value or periodically. The paper further analyses, via simulations on a real portfolio, the impacts of interest rate moves on the economic value of equity and the earnings at risk. Interest rate risk in the banking book how to manage.
In 2016, the basel committee on banking supervision bcbs issued new standards on interest rate risk in the banking book commonly referred to as irrbb. Liabilities include all nonremunerated deposits but exclude cet1 capital under the basel iii framework. 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. 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. Basel iv revised trading and banking book boundary for. An examination of the banking crises of the 1980s and early 1990s, federal deposit insurance corporation. The passages of the basel text to which this circular refers to shall always be indicated in square brackets. The first day will look at the complexity of irrbb including sessions focusing on irr metrics, risk appetite and designing scenarios and sensitivity analysis.
Implementing bcbs 368 interest rate risk in the banking book in. In 2018, the basel committees revised standard for interest rate risk in the banking book irrbb will be implemented. Therefore, the focus is on the impact of the change of the interest rate level. In april 2016, the basel committee on banking supervision bcbs issued final standards on irrbb that replace the 2004 principles for the management and supervision of interest rate risk.
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