Capital for interest rate risk in banking book

What is interest rate risk in the banking book irrbb. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below. 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 the interest it is receiving from loans. Standards on the interest risk in the banking book irrbb. The committee remains convinced that interest rate risk in the banking book is a potentially significant risk which merits support from capital basel ii, 762, basel committee, 2006. Excessive irrbb interest rate risk on banking book can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately, the rbi said. Interest rate risk in the banking book is the risk posed by adverse movements in. This is referred to as interest rate risk in the banking book irrbb, since most of the risks to banking book revenues. Rajesh kumar, in strategies of banks and other financial institutions, 2014. Rbi issues draft guidelines on interest rate risk on.

Consultations on revisions to the capital framework for. Interest rate risk is the risk to current or anticipated earnings or capital arising from movements in. The management of interest rate risk is therefore critical to the stability of any banking corporation. 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. The european banking authority eba, in accordance with its pillar 2 roadmap, published today its final revised guidelines aimed at further enhancing institutions risk management and supervisory. 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. Final bcbs standards on interest rate risk in the banking. Basel committee guidance a bit of history 1993 consultative paper on measuring banks exposure to interest rate risk 1997 principles for interest rate risk management in both banking and trading. 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. 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. In addition, beata is actively providing trainings for professionals from the banking industry in latvia, poland, uk and in the us.

The consultations on all three guidelines run until 31 january 2018. These guidelines on managing interest rate risk in the banking book are intended to provide guidance on. Interest rate risk in the banking book capital requirement. The simplest definition of eve is the net present value npv of a banks balance sheets cash flows. Deutsche bank annual report 2016 nontrading market risk. 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. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate. This chapter focuses on generating cashflow forecasts for banking book business lines.

The first day will look at the complexity of irrbb including sessions focusing on irr metrics, risk appetite and designing scenarios and sensitivity analysis. This is a longterm economic measure used to assess the degree of interest rate risk exposure. Nontrading market risk exposures deutsche bank annual. 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. The interest rate risk in the banking book can be measured and controlled at present value or periodically. This began in june 2004 when the basel committee on banking.

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 management of interestrate risk in the banking book irrbb has been. Excessive irrbb can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately. European banking federation aisbl avenue des arts 56 b brussels. Revised trading and banking book boundary for market risk 11 total sample. 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. Basel iv revised trading and banking book boundary for. 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. Interest rate risk in the banking book for authorised deposittaking institutions september 2019 pdf 591. Interest rate risk is the exposure of a banks current or future earnings and capital to adverse changes in market interest rates. Bcbs standard for interest rate risk in the banking book.

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. However, with appropriate interest rate risk management programs, the inherent interest rate risks that are intrinsic to banking can be managed effectively for given levels of capital and earnings. This topic also provides specific guidance on interest rate risk, which is the exposure of a banks current and future earnings and capital arising from adverse movements in interest rates, and the market risk capital rule, which establishes regulatory capital requirements for bank holding companies and state member banks with significant. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse.

She has spent most of her career managing irrbb for a number of financial institutions. 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. Interestrate risk in the banking book irrbb regtech. Interest rate risk in the banking book and capital requirement issues on eve and ear roberto nygaard the views expressed in this work are those of the author and do not necessarily reflect those of the banco central do brasil or its members. Introduction interest rate risk in the banking book or irrbbas.

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. When interest rates change, the present value and timing of future cash flows change. 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. Interest rate risk in the banking book means losses to earnings andor economic value of financial institutions as a result of change in interest rate which may arise from both on and offbalance sheet. 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 risk is a normal part of banking and can be an important source of profitability and shareholder value. 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. The basel committee on banking supervision has today issued standards for 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.

Accordingly, effective risk management that maintains interest rate risks at prudent levels is. Frtb proposed that each risk factor should be assigned a liquidity horizon for. Interest rate risk has the potential to create adverse effects on the financial results and capital of the bank arising from positions in the banking book. 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. Jun 07, 2019 examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. Interest rate risk an overview sciencedirect topics.

In the european union, irrbb is captured under the capital requirements. Abstract the interest rate in the banking book irrbb is a risk factor presently under regulators. 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. 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.

The mismatch would subsequently bite into the banks net interest income, as well as affecting the economic value of its equity eve, which is derived by. Fis risk management and reporting solutions can help you minimize liquidity risk for better management of the balance sheet and give you the right strategic direction to address banking regulations like interest rate risk in the banking book irrbb and ifrs 9. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. 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. This topic also provides specific guidance on interestrate risk, which is the exposure of a banks current and future earnings and capital arising from adverse movements in interest rates, and the market risk. 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. 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. Guidelines on technical aspects of the management of interest. 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.

This sets out the methodologies we will use to inform the setting of a firms pillar 2a capital requirement for credit risk, market risk, operational risk, counterparty credit risk, credit concentration risk, interest. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Economic capital charge for interest rate risk in the banking book, including gap risk, basis risk and option risk, such as the risk of a change in client behavior embedded in modelled non. 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.

Interest rate risk in the banking book hong kong dollar. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. Interest rate risk in the banking book and capital. The pras methodologies for setting pillar 2 capital. This risk is a normal part of banking and can be an important source of. Irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in interest rates that affect the banks banking. Guidelines on the management of interest rate risk arising. 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. 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. Deutsche bank annual report 2017 nontrading market risk. Eba publishes final guidance to strengthen the pillar 2. Interest rate risk management at community banks community.

Differences between interest rate risk irr in the banking. 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. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. The revisions focus on stress testing, particularly its use in setting pillar 2 capital guidance p2g, as well as interest rate risk in the banking book irrbb. 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. An adi s irrbb capital requirement, as determined by its internal model, must be calculated as. Interest rate risk in the banking book is the current or prospective risk, to both the banks capital and earnings, arising from adverse movements in interest rates, which affect the banks banking book exposures. Excessive levels of interest rate risks in the banking book can pose a significant threat to an institutions earnings and capital base. Fis risk management and reporting solutions can help you minimize liquidity risk for better management of the balance sheet and give you the right strategic direction to address banking regulations like. 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 standards revise the committees 2004 principles for the. The view expressed by the basel committee in the basel ii capital accord receives strong support. Unofficial translation this translation is for 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.

Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking institutions. 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. Conceptually, this risk is covered by pillar ii capital as part. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016.

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. Due to different fixed interest rates of assets and liabilities allocated to the banking book, credit institutions are exposed to a risk of changing interest rates on the money and capital markets. 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. Any changes in interest rates have an impact on the present value of future cash flows on the bank. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1.

Whitepaper interest rate risk in the banking book irrbb. 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. The acceptance and management of financial risk is inherent to the business of banking and banks roles as financial intermediaries. This is known as interest rate risk in the banking book or irbb. Beatas background is strongly focused on interest rate risk in the banking book irrbb, balance sheet management and behavioural modelling for banks asset liability management purposes. 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. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase.

Bcbs proposals for interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb definition. Interest rate risk in the banking book irrbb bankinghub. 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. Examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on.