Interest rate risk and credit spread risk in the banking book. 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. Ss3115 the internal capital adequacy assessment process. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. There are new rules for an appropriate assessment of the interestrate risk of new products in the banking book e. 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. This includes gap risk, which arises from the term structure of banking book instruments, basis risk, which describes the impact of. 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 assets and liabilities and off. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. 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. A var models estimates should be sensitive to changes in the trading book risk profile.
Process icaap approved by the governing body, in line with the banks risk. Guidelines on technical aspects of the management of. Whitepaper implementing interest rate risk in the banking. The irrbb was instigated by the white paper produced by the bank for international. Deutsche bank annual report 2017 nontrading market risk.
The list of abbreviations related to irrbb interest rate risk 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 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 march. 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. Interest rate risk in the banking book irrbb is currently part of the basel capital.
We cover some of the ways in which liquidity risk may be stress tested under the internal capital adequacy and assessment process icaap. The icaap considers all risks faced by the bank, mainly. 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. Standards on the interest risk in the banking book irrbb. Pillar i risks credit risk, market risk, operational risk, risks not captured under pillar i but elaborated under pillar ii credit concentration risk, interest rate risk in the banking book, liquidity risk, reputation risk, strategic risk. 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 guidelines set out highlevel guidance, addressed to both credit institutions and investment firms, related to interest rate risk arising from nontrading activities irrbb. 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 the management of interest rate risk arising. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges.
If you have 3 or more participants, it may be cost effective to have this course presented inhouse via live webinar for you. Interest rate risk in the banking book irrbb refers to the current or. Interestrate risk in the banking book irrbb regtech. The feedbackcomments on the proposals contained in this document may be sent to the following address by march 3, 2017 electronic submission is encouraged. Ir1 interest rate risk managementin the banking book tion. 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. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk. 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. Its aim is to identify earnings volatility over a 12monthhorizon against the two. The reserve bank of india has today placed on its website the draft guidelines on interest rate risk in banking book. What is interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb definition.
Andreas dombret, member of board, deutsche bundesbank in. 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. Pra supervisory statement 3115 the internal capital. The interest rate risk in banking book refers to the risk to a banks capital and. This 4day training event is developed specifically to address the new standards on interest rate in the banking book and role of risk and capital management in modern banking. 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. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii.
Refer to osfis internal capital adequacy assessment process icaap for. Internal capital adequacy assessment process icaap. The panel of participating banks was a balanced mix of significant entities under ecb. These involve simple sensitivity analysis techniques, such as applying liquidity and interest rate shocks to the assets and liabilities of the bank. 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. 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.
Fx lending risk, country risk, credit concentration risk, migration risk market risk also including. Whitepaper interest rate risk in the banking book irrbb. The paper sets out supervisory expectations regarding the measurement, management and governance arrangements of irrbb and its reflection in the icaap. It is the most obvious source of interest rate risk for an ai. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below. 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 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.
Gap risk, which arises from the term structure of banking book instruments resulting in rate changes impacting instruments at different times. The clients business is mainly feedriven but, in order to ensure. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Ir1 interest rate risk managementin the banking book v. The guidance note is consistent with the standards on irrbb as published in april 2016 by the basel committee on banking supervision bcbs.
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. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Implementing bcbs 368 interest rate risk in the banking book in switzerland your contacts at pwc andrea martin schnoz director, assurance andrea. The icaap should include all material interest rate risk positions of the institution and consider all relevant repricing and maturity data. 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. Rbi invites feedbackcomments on the draft guidelines. The european entity offers a range of services focused on asset servicing mainly global custody and collateral management to international market participants.
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. 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. Interest rate risk in the banking book irrbb bankinghub. 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. 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. 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. 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. 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 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 interest rate risk in the banking book can be measured and controlled at present value or periodically. 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. Interest rate risk in banking book irrbb refers to the current or prospective risk to. Basis risk, which relates to the impact of rela tive changes in interest. The framework under which an institution should develop its icaap is designed to be riskbased and emphasises the importance of capital planning, but also. Internal capital adequacy assessment process icaap for.
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