The interest rate risk in the banking book can be measured and controlled at present value or periodically. 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. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury. 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. Excessive irrbb can pose a significant threat to a bank s current capital base andor future earnings if not managed appropriately. This option foresees the responsibility of the supervisor for an adequate irrbb capital requirement, calculated on the interest rate risk profile of the banking institution. This booklet applies to the occs supervision of national banks and federal savings associations. Paul newson is working with the uk asset and liability management association alma to help develop an alm professional qualification, as well as delivering their interest rate risk in the banking book irrbb training course. Bcbs proposals for interest rate risk in the banking book irrbb. Nov 21, 2017 the analytical var for interest rate risk in the banking book can be calculated as follows. Nov 07, 2019 interest rate risk is the risk that arises when the absolute level of interest rates fluctuate and directly affects the values of fixedincome securities. 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.
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 irrbb is part of the basel capital frameworks pillar 2. Interest rate risk in the banking book faq 7 whilst allowing firms to strike a compromise between net interest income sensitivity and economic value sensitivity that cannot be simultaneously cancelled out. 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. Interest rate risk in the banking book the course will be taught in a classroom based format with a variety of professionals from the industry including, the federal reserve bank, us bank. 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. This includes gap risk, which arises from the term structure of banking book instruments, basis risk, which describes the impact of. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Interest rate risk in the banking book interest rate risk in the banking book irrbb can be a significant risk for banking institutions and new regulations will have a significant impact on their risk management frameworks. What is the difference between a banking book and a trading. What is interest rate risk in the banking book irrbb. Interest rate risk in the banking book inhouse training. Article interest rate risk in the banking book irrbb fis.
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. 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. Guidelines on the management of interest rate risk arising from. Any changes in interest rates have an impact on the present value of future cash flows on the bank. 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. This publication can be found online on the ebf website and is. The book is essential reading for all those involved with interest rate risk in the banking book but particularly those working in a bank alm function who wish to gain a wider appreciation of the context in which they operate, more generalist and senior bankers who need a grasp of the fundamentals and those working in a trading risk function. 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.
Vice president, interest rate risk in the banking book. 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 definition. 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 irrbb therefore reflects both the bank s fundamental business model and its assetliabilitymanagement alm strategy. Overview interest rate risk in the banking book irrbb. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a banks capital and. Banks provide their views on the regulators proposals to add interest rate risk in the banking book irrbb to the calculation of banks pillar 1 minimum capital requirements 1. 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.
Meeting the practical challenges moodys analytics introduction in a world of low interest rates, the thought of what could happen if there is a sudden interest rate shock. 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. The individual will work in interest rate risk irr team within citis corporate treasury. Guidelines on technical aspects of the management of. 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. First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. 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. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk 4, which laid out the principles and the methods expected to be used by banks for measuring, managing, monitoring and. In recent years, interest rate risk in the banking book irrbb has moved up.
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. If a bank does an interest rate swap with a customer, thats trading book. The precise answer is both complex and involves considerable latitude for opinion. Deutsche bank annual report 2017 nontrading market risk. What is the difference between a banking book and a. The key requirements of this prudential standard are that an authorised deposittaking institution must. Interest rate risk in the banking book irrbb bankinghub. 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. Department of banking regulation reserve bank of india, central office mumbai 400 001. This began in june 2004 when the basel committee on banking supervision bcbs released the revised capital.
It is important to note the advantage of using independent principal components. Interest rate risk in the banking book the course will be taught in a classroom based format with a variety of professionals from the industry including, the federal reserve bank, us bank, ge capital and suntrust. Whitepaper interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb therefore reflects both the banks fundamental business model and its assetliabilitymanagement alm strategy. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. The irr team is responsible for measuring, reporting and managing interest rate risk in the banking book. This topic also provides specific guidance on interest rate risk, which is the exposure of a bank s 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, 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. When interest rates change, the present value and timing of future cash flows change. Interest rate risk management strategies and irrbb sessions include the impact of low rates and negative rate challenges, how to manage deposit beta, and how to handle the effects of the ibor transition on irrbb. A general rise in interest rates may boost earnings of a bank, but it would normally cause a decrease in the economic value of equity because of. The requirement imposed on all banking corporations to allocate adequate capital against all the risks in their business, including interest rate risk, is dealt. 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. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices.
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. Learn how to evaluate interest rate risk in the banking book and its impact on a banks balance sheet and earnings. 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. Interest rate risk in the banking book adeva partners.
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. Differences between interest rate risk irr in the banking. 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. Jun 07, 2017 the precise answer is both complex and involves considerable latitude for opinion. There is often confusion about the different nature of the interest rate risk irr in the banking book versus the trading book and what needs. Guidelines on the management of interest rate risk arising. 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. In may 2015, the european banking authority eba published a final report with guidelines on the management of interest rate risk arising from nontrading activities. Interest rate risk exists in an interest bearing asset, such as a loan or a bond, due to the possibility of a change in the assets value resulting from the variability of interest rates.
In recent years, interest rate risk in the banking book irrbb has moved up the priority list for regulators. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory. Expert panel on interest rate risk in the banking book irrbb. Download it once and read it on your kindle device, pc, phones or tablets. 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. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest. For this purpose, the bcbs introduced a detailed definition of twelve interest rate risk management principles replacing the fifteen principles of the 2004 document. Calculating interest rate risk in the banking book. This booklet provides an overview of interest rate risk comprising repricing risk, basis risk, yield curve risk, and options risk and discusses irr management practices. Interest rate risk management hong kong monetary authority. Interest rate risk in the banking book irrbb frequently asked questions this publication has been prepared by the european banking federation in response to the questions frequently raised during outreach meetings on the treatment of the interest rate risk in the banking book. 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.
The treatment of automatic options under the standardized approach brings. Use features like bookmarks, note taking and highlighting while reading interest rate risk in the banking book. In addition, he regularly teaches on irrbb around the world. 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. 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. Whitepaper implementing interest rate risk in the banking. The analytical var for interest rate risk in the banking book can be calculated as follows. Interest rate risk in the banking book kindle edition by newson, paul. Differences between interest rate risk irr in the banking and.
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