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