What is the difference between a banking book and 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. Interest rate risk refers to the risk of loss of a bank s current and future revenues due from trading and banking book assets and the risk of erosion in the value of those assets on account of movement in the rates. 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 analytical var for interest rate risk in the banking book can be calculated as follows. Interest rate risk in the banking book irrbb therefore reflects both the banks fundamental business model and its assetliabilitymanagement alm strategy. The interest rate risk in banking book refers to the risk to a banks capital and. 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. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Whitepaper interest rate risk in the banking book irrbb. When interest rates change, the present value and timing of future cash flows change. Does anyone know where i could find a list of required risk assessments for credit unions. Its aim is to identify earnings volatility over a 12monthhorizon against the two. 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.
Calculating interest rate risk in the banking book. I am trying to get all that i know of current, but would like list of required annual assessments. Bcbs proposals 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. Excessive levels of interest rate risks in the banking book can pose a significant threat to an institutions earnings and capital base. 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 a banks banking book positions. Rbi invites feedbackcomments on the draft guidelines. Previously she fullfilled leading roles at abn amro in the areas of derivative valuation and risk management models, economic capital for market risk and interest rate risk for the banking book, alm modelling and strategy. I present an analytical valuation framework for the management of fixedincome instruments traded in imperfectly competitive markets, like. Video would be covering about regulatory of interest rate risk in banking books. Interest rate risk in the banking book irrbb refers to the current or prospective risk to a banks capital and to its earnings, arising from the impact of adverse movements in interest rates on its banking book. History exchange funds statutory purposes and investment objectives investment management investment performance risk management responsible investment exchange fund statistics and publications. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below.
Interest rate risk in the banking book and strategic planning areas of the bank should also communicate regularly to facilitate. Srp98 application guidance on interest rate risk in the. 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. How to manage irrbb considering the monetary policy and the new regulation. The reserve bank of india has today placed on its website the draft guidelines on interest rate risk in banking book. Principles 8 and 9 set out the expectations for market disclosures and banks internal assessment of capital adequacy for irrbb respectively. 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. Guidelines on technical aspects of the management of.
The chapter concludes with an attempt to define the banking book although, as will become apparent, this is not necessarily as straightforward as. 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. 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. Investors need to know which ones will best serve their needs in todays dynamic bond market. This is known as interest rate risk in the banking book or irbb. Deutsche bank annual report 2017 nontrading market risk. The feedbackcomments on the proposals contained in this document may be sent to the following address by march 3, 2017 electronic submission is encouraged. 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 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.
European banking authority, guidelines on the management of interest rate risk. The banking book is a term for assets on a bank s balance sheet that are expected to be held to maturity, usually consisting of customer loans. 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. 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. Interest rate risk in the banking book irrbb definition. 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.
In addition, he regularly teaches on irrbb around the world. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or prospective risk to a bank s capital and earnings, arising from adverse movements in interest rates that affect. Interest rate risk will be introduced, first as a particular category of market risk, followed by a description of the various forms it can take, namely yield curve risk, basis risk and option risk. Interestrate risk in the banking book irrbb regtech.
Interest rate risk in the banking book chappuis halder. Hong kong monetary authority interest rate risk management. 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. Standards on the interest risk in the banking book irrbb. It is important to note the advantage of using independent principal components. Short interest is a marketsentiment indicator that tells whether. 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 irrbb bankinghub. Fundamentals of interest rate risk and the banking book. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. 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. Proper conduct of banking business directive 1 5 management of interest rate risk page 33326 standardized rate shock scenarios on the banking book, according to the guidelines in addendum 2 to the directive.
The precise answer is both complex and involves considerable latitude for opinion. 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. 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. A short interest is the quantity of stock shares that investors have sold short but not yet covered or closed 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. The new standards will apply from january 2018 onwards but some supervisors have already given a lot of attention to how irrbb is monitored and managed at many banks, given the current concerns about the lingering low interest rate environment. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the. 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. If a bank does an interest rate swap with a customer, thats trading book. 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. Banks must have an adequate irrbb management framework, involving regular. In april 2016, the basel committee on banking supervision bcbs issued final stan dards for irrbb that replace the 2004 principles for the management and. Interest rate risk on the banking book irrbb is defined as the current or. What is interest rate risk in the banking book irrbb.
This book reveals how more than three dozen experts control and preserve the value of their own fixed income portfoliosfrom choosing the right risk management product to monitoring and evaluating the effectiveness of hedge management strategies. 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. 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. 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. 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. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability. Interest rate risk on the banking book springerlink. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii.
Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking institutions. There are plenty of books on interest rate risk itself, but most tend to consider it from a trading or wholesale marketfacing perspective and, as a result, focus principally on the mathematics of quantifying risk, the likelihood of its occurrence and the features of the more complex financial instruments that exist in the wholesale market. Guidelines on the management of interest rate risk arising. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. 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. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the bank s capital and earnings arising from adverse movements in interest rates that affect the bank s banking book positions. 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. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book.
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