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 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. Interest rate risk management at community banks community. 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. For the trading book, specific methodologies were proposed. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. 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.
Final bcbs standards on interest rate risk in the banking. 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. 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 in 2015, two documents were published that will have a significant impact on the risk management framework of banking institutions. Whitepaper interest rate risk in the banking book irrbb. 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. Interest rate risk in the banking book hong kong dollar. Whitepaper implementing interest rate risk in the banking. This risk is a normal part of banking and can be an important source of. This began in june 2004 when the basel committee on banking. Differences between interest rate risk irr in the banking. Interest rate risk in the banking book capital requirement.
This is referred to as interest rate risk in the banking book irrbb, since most of the risks to banking book revenues. 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. This is known as interest rate risk in the banking book or irbb. 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. 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. Introduction interest rate risk in the banking book or irrbbas. 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 acceptance and management of financial risk is inherent to the business of banking and banks roles as financial intermediaries. In addition, beata is actively providing trainings for professionals from the banking industry in latvia, poland, uk and in the us. 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. Interest rate risk in the banking book irrbb june uk. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking institutions. 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.
This chapter focuses on generating cashflow forecasts for banking book business lines. In the european union, irrbb is captured under the capital requirements. The view expressed by the basel committee in the basel ii capital accord receives strong support. 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. Eba publishes final guidance to strengthen the pillar 2. 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. 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 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. 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. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges.
Rajesh kumar, in strategies of banks and other financial institutions, 2014. 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 over the past decade the basel committee on banking supervision the basel committee has released a number of consultative documents discussing the. 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. Bcbs proposals for interest rate risk in the banking book irrbb. 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 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. Interest rate risk is an integral part of banking business, and may even be a source of profit. 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.
Guidelines on technical aspects of the management of interest. The pras methodologies for setting pillar 2 capital. Examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn. 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.
How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below. 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. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. 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 and capital. What is interest rate risk in the banking book irrbb. Bcbs standard for interest rate risk in the banking book. Article interest rate risk in the banking book irrbb fis. 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. 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. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016.
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. 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 irrbb overview interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. 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 standards revise the committees 2004 principles for the. Revised trading and banking book boundary for market risk 11 total sample. 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. Jun 25, 2019 this is a longterm economic measure used to assess the degree of interest rate risk exposure. She has spent most of her career managing irrbb for a number of financial institutions. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2.
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. 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. A particular definition was introduced related to the interest rate risk capital charge. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. Frtb proposed that each risk factor should be assigned a liquidity horizon for. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1. Unofficial translation this translation is for the. Jun 07, 2019 examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on. The consultations on all three guidelines run until 31 january 2018. Nontrading market risk exposures deutsche bank annual. Excessive irrbb can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately. Banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest.
Interest rate risk is the risk to current or anticipated earnings or capital arising from movements in. Deutsche bank annual report 2017 nontrading market 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. 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 objective and key requirements of this prudential standard this prudential standard sets out the requirements that an. Standards on the interest risk in the banking book irrbb.
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. Accordingly, effective risk management that maintains interest rate risks at prudent levels is. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Consultations on revisions to the capital framework for. The simplest definition of eve is the net present value npv of a banks balance sheets. Abstract the interest rate in the banking book irrbb is a risk factor presently under regulators. 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. Interest rate risk an overview sciencedirect topics.
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 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. Basel iv revised trading and banking book boundary for. 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. Interest rate risk in the banking book is the risk posed by adverse movements in.
The interest rate risk in the banking book can be measured and controlled at present value or periodically. When interest rates change, the present value and timing of future cash flows change. Guidelines on the management of interest rate risk arising. One of the fundamental objectives in banking is to borrow funds at a lower rate and lend them at a higher rate, thereby making profits. Its aim is to identify earnings volatility over a 12monthhorizon against the two. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. 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. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and. The simplest definition of eve is the net present value npv of a banks balance sheets cash flows. Interest rate risk is the exposure of a banks current or future earnings and capital to adverse changes in market interest rates. 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. The management of interestrate risk in the banking book irrbb has been. 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.
Deutsche bank annual report 2016 nontrading market risk. Interest rate risk in the banking book for authorised deposittaking institutions september 2019 pdf 591. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate. Interest rate risk in the banking book irrbb bankinghub. This risk is a normal part of banking and can be an important source of profitability and shareholder value. 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. An adi s irrbb capital requirement, as determined by its internal model, must be calculated as. Conceptually, this risk is covered by pillar ii capital as part. European banking federation aisbl avenue des arts 56 b brussels. 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. 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 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. Rbi issues draft guidelines on interest rate risk on. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. 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. 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. This is a longterm economic measure used to assess the degree of interest rate risk exposure. Any changes in interest rates have an impact on the present value of future cash flows on the bank. 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. The first day will look at the complexity of irrbb including sessions focusing on irr metrics, risk appetite and designing scenarios and sensitivity analysis.