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 marcus evans. Treatment of interest rate risk in the banking book in latin. Interest rate risk is an integral part of banking business, and may even be a source of profit. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. Interest rate risk in the banking book hong kong dollar. Interest rate risk in the banking book irrbb is currently part of the basel capital. Interest rate risk in the banking book irrbb is a banks exposure to adverse movements in interest.
Following the publication in june 2016 of the new standards on interest rate risk in the banking book irrbb by the basel committee on banking supervision, the deloitte emea irrbbalm working group invited european and south african banks to participate to an online survey to assess their current state of readiness against the new basel standards. Whitepaper implementing interest rate risk in the banking. Interest rate risk management at community banks community. 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. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. Mar 28, 2012 interest rate risk in the banking book understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book event start date. Interest rate risk in the banking book deloitte financial. While interest rate risk can arise from various sources, four key types of interest rate risk are common to community bank balance sheets. 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. Standards on the interest risk in the banking book irrbb.
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. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory. The interest rate risk in banking book refers to the risk to a banks capital and earnings arising. 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. An analysis of commercial bank exposure to interest rate risk. Interest rate risk in the banking book kindle edition by newson, paul. Interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution, respectively. 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.
Differences between interest rate risk irr in the banking. Leeto tlou and jonathan hacker provided assistance. 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. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. 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. 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. Does prudential regulation contribute to effective measurement and. In identifying, measuring, monitoring and controlling irrbb. Pdf interest rate risk and bankspecific characteristics. Irrbb includes potentially adverse effects on earnings, capital, or both.
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, written by industry expert paul newson, provides a thorough guide to the new regulatory requirements surrounding irrbb and demonstrates the importance of good governance. A new methodological framework to estimate banks interest rate risk is. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. The management of interest rate risk is therefore critical to the stability of any banking corporation. Relates only to a bank that calculates the relationship between interest rate movements or shocks and non interest income, bad debts and other relevant variables. Irrbb in 2016, which includes the detailed standardized framework for measuring the irrbb. Interest rate risk management latest about banking. Houpt, of the boards division of banking supervision and regulation, prepared this article. Irrbb interest rate risk in the banking book a bearingpoint accelerator eba and the basel committee reacted to the current low interest environment with new or further detailed requirements for banks dealing with the risk arising from general banking business, known as interest rate risk in the banking book irrbb. Changes in interest rate affect earnings, value of assets, liability, offbalance sheet items and cash flow.
Table irrbba provides information on a bank s irrbb risk management objective and policy. With the interest rate risk of the banking book, the basel committee on. Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition. Interest rate increase 35 interest rate decrease 36 1. Guidelines on technical aspects of the management of interest. An analysis of commercial bank exposure to interest rate risk david m. Feb 14, 2017 the methods of calculation of interest rate risk are outlined next and the international guidelines on interest rate risk are surveyed. 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 interest rate risk in the banking book can be measured and controlled at present value or periodically. Sep 08, 2010 interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. In identifying, measuring, monitoring and controlling irrbb, banks should also ensure that csrbb is properly monitored and assessed. Irrbb deals with the risks associated with a change in interest rates, and affecting a banks banking book, as opposed to its trading book. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Jul 20, 2016 on the 3rd of june 2016, marcus evans held a webinar entitled interest rate risk in the banking book in partnership with oracle for their global financial market webinars portfolio. 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. Therefore, the focus is on the impact of the change of the interest rate level on the present value of an institutions assets. Interest rate risk in the banking book irrbb masterclass. 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.
T he management of interest rate risk should be one of the critical components of market risk management in banks. Interest rate risk in the banking book irrbb definition. Any changes in interest rates have an impact on the present value of future cash flows on the bank. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Andreas dombret, member of board, deutsche bundesbank in.
The risk that assets and liabilities reprice or mature at different times, causing margins between interest income and interest expense to narrow. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities. Whitepaper interest rate risk in the banking book irrbb. 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. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios. Download it once and read it on your kindle device, pc, phones or tablets. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Measuring interest rate risk for the banking book by meera. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates.
Department of banking regulation reserve bank of india, central office mumbai 400 001. Sources of irrbb include interest rate gaps, basis risk, yield curve risk and option risk. Interest rate risk is an important risk that can affect the safety and soundness of. 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. 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. Use features like bookmarks, note taking and highlighting while reading interest rate risk in the banking book. 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. Interest rate risk in the banking book irrbb bankinghub. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off balance sheet short and long term positions basis risk, risks arising from hedging exposure to one interest rate with exposure to a rate which reprices under slightly different conditions yield curve risk, risks.
In april 2016, the basel committee on banking supervision issued standards for interest rate risk in the banking book irrbb. With respect to interest rate risk management in the banking book, an alm consolidated risk report based on sensitivities and stress scenario results is provided to top management on a. Template irrbb1 provides quantitative irrbb information, including the impact of interest rate shocks on their change in economic value of equity and net interest income, computed based on a set of prescribed interest rate shock scenarios. Differences between interest rate risk irr in the banking and. For a larger andor more complex firm, appropriate systems to evaluate and manage interest rate risk in the nontrading book should 2include 2 1 the ability to measure the exposure and sensitivity of the firms activities, if material, to repricing risk, yield curve risk, basis risk and risks arising from embedded optionality for example, pipeline risk, prepayment risk as well as2changes. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. 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. What is interest rate risk in the banking book irrbb. The standards revise the committees 2004 principles for the management and supervision of interest rate risk. 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 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. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off balance sheet short and long term positions basis risk, risks arising from hedging exposure to one interest rate with exposure to a.
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