In practice, interest rate risk in the banking book has been discussed from the perspectives of both economic value and earnings. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. Whitepaper implementing interest rate risk in the banking. 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 to and deposits from retail and corporate customers. 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.
Book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest rates that affect a banks. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. These products were frequently marketed to customers who had a loan with the bank. Some banks seek to minimize their interest rate risk exposure. The bcbs published its final standards on interest rate risk in the banking book irrbb in april 2016, with guidelines set to be implemented by 2018. Interest rate risk has several components including.
The new framework replaces its previous version from 2004 and sets out nine principles for banks and three principles for supervisors for the management and supervision of irrbb. Irrbb practice towards comprehensive framework of interest rates risk. Management of market risk european covered bond council. Details of types and interest rate risk impacts are in attachment 1. Interest rate risk in the banking book marcus evans. 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 is a bank s exposure to adverse movements in interest rates. Apr 21, 2016 banks face tighter rules on interest rate risk in basel revamp. Rise in interest rate risk of regional banks under new phase of.
Organizational structure of banks, banking regulations, interest rate risk management in banks, credit risk management in banks, liquidity management in banks, operational risk management in banks, market risk management in. Irrbb and operational risk management requirements are generally in place and adhered to, but the release of more. Banks differ, however, in the level and degree of interest rate risk they are willing to assume. This context has led regulators to focus more closely on the interest rate risk in the banking book. Repricing risk yield curve risk option risk o prepayment extension risk basis risk how financial institutions identify, measure, monitor, and control these risks is critical to an effective irr management program. Interest rate risk, is prepared for use by occ examiners in connection with. 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.
The interest rate risk in the banking book can be measured and controlled at present value or periodically. Basel committee on banking supervision consultative. 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. 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. The bba delivers an extensive programme of events for those in banking and the related financial and professional services sectors in the form of conferences, seminars and briefings that put you at the heart of the latest developments in your industry. Whitepaper interest rate risk in the banking book irrbb. The prudential regime for trading activities august 2010 rent extraction by investment banking operations, then imposing deliberately conservative standards may still make the system safer without imposing the same costs on the wider economy. Download it once and read it on your kindle device, pc, phones or tablets. Interest rate risk in the banking book irrbb more specifically refers to the current or prospective risk to the bank s capital and earnings arising from adverse movements in interest rates affect the institutions banking book.
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 irrbb bankinghub. 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. Amendments to the guidelines on the management of interest rate risk arising from nontrading activities to take effect on 30 june 2019 26 march 2019. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Measurement of banks exposure to interest rate risk author. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or.
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 banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. 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. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. The risk of loss resulting from changes in interest rates. The earlier guidance on interest rate risk goes all the way back to july 2004. The financial services authority fsa invites comments on this discussion paper.
Interest rate risk in the banking book kindle edition by newson, paul. Are banks ready for a return to a normal environment. Interest rate risk in the banking book zanders treasury. Fis methods for assessing individual risk types within pillar 2. Interest rate risk management hong kong monetary authority. Banks face tighter rules on interest rate risk in basel. Vice president, interest rate risk in the banking book, business support and analysis team team.
These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift of a yield curve in particular maturity segments. This publication can be found online on the ebf website and is subject to regular updates. Fsa institute the management of interest rate risk in the banking book is a significant issue for banks which earn profits by making loans and investing in securities using deposit funding. Interest rate risk federal deposit insurance corporation.
Ilaa fsa individual liquidity adequacy assessment ilg fsa individual liquidity guidance imf international monetary fund irb internal ratingsbased approach for credit risk irrbb interestrate risk in the banking book isa international standards on auditing itap fsa information technology architecture program kyc know your customer. Each financial transaction that a bank completes may affect its interest rate risk profile. Financial services authority the prudential regime for. The interest rate risk management policy should be approved by the board. Interest rate risk in the banking book sara nooralicarlos santos1. 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 in the banking book is too dependent on the specific characteristics of institutions to enable a formalized capital requirement. Table irrbba provides information on a bank s irrbb risk management objective and policy. The irr team is responsible for measuring, reporting and managing interest rate risk in the banking book. The precise answer is both complex and involves considerable latitude for opinion.
Fsa update interest rate hedging products information about our work and findings interest rate hedges include a variety of different products sold to customers to help protect them against interest rate risk. The management of interest rate risk is therefore critical to the stability of any banking corporation. Overview of the authoritys approach to interest rate risk management 3. 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. 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. Fi has chosen to use the term interest rate risk in the banking book irrbb in this memorandum. The adequacy and effectiveness of a bank s interest rate risk management are important in determining whether a bank s level of interest rate risk exposure poses supervisory concerns or.
It is the responsibility of senior management to draw up the appropriate policy in the light of the particular circumstances of 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. Overview interest rate risk in the banking book irrbb. Guidelines on the management of interest rate risk in the banking book enter into force on 1 january 2016 4 january 2015. Comptrollers handbook 4 interest rate risk confirm that the bank has an appropriate irr management system in place. This risk is a normal part of banking and can be an important source of profitability and shareholder value. 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. Therefore, the changing interest rates have had a substantial impact on the banks profits. Interest rate risk in the banking book how to manage. 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 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. Use features like bookmarks, note taking and highlighting while reading interest rate risk in the banking book.
Vice president, interest rate risk in the banking book. In accordance with the key enhancements set out in the finalized standards for interest rate risk in the banking book irrbb published by the basel committee on banking supervision in april 2016, and in due consideration of current low interest rate environment and such, the proposal aims to revise methodologies for monitoring of interest rate. An analysis of commercial bank exposure to interest rate risk. Measurement of banks exposure to interest rate risk. 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. What is interest rate risk in the banking book irrbb. On the onehand, the portfolio of tradable financial instruments, in particular bonds and derivatives, is subject tocontinuous valuation according to the respective market value and this is a function of the current.
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. This booklet addresses interest rate risk irr and other risks associated with irr and. 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. Fis methods for assessing individual risk types within. Scenarios once the scope of the interest rate risk method has been determined, then consideration can be given to the scenarios with interest rate shocks that will be used in the. Implementing bcbs 368 interest rate risk in the banking. 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 individual will work in interest rate risk irr team within citis corporate treasury. Financial services agency fsa, do not exceed 20% of their core capital2. 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. If a bank does an interest rate swap with a customer, thats trading book. We study the allocation of interest rate risk within the european banking sector using novel data.
The bba has a longstanding reputation for highquality and relevant industryfocused events. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. This course note intends to introduce students to bank administration with emphasize on its risk management practices. This booklet applies to the occs supervision of national banks and federal savings associations. Interest rate risk in the banking book irrbb therefore reflects both the bank s fundamental business model and its assetliabilitymanagement alm strategy. For creditrelated concentration risk, fi intends to assess the capital requirement for singlename concentration, industry concentration and geographical concentration using a method based on the. This chapter considers behaviour and characteristics of net interest income nii and net interest margin nim, before moving on to key principles of interest rate risk in the banking book. Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. 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. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016.
Management of interest rate risk arising from nontrading. In principle, interest rate hedging products can meet customers needs, as they provide greater certainty over future loan repayments. The requirement imposed on all banking corporations to allocate adequate capital against all the risks in their business, including interest rate risk, is dealt. For the ebf position paper on interest rate risk in the banking book, please consult the following link. Nov 22, 2005 with a view to promoting sound competition via improved governance and risk management function of financial institutions, the financial services agency fsa aims to appropriately monitor all significant risks including risks that are not covered in the calculation of capital adequacy ratio, such as the interest rate risk in the banking book. These types of risk are creditrelated concentration risk, interest rate risk in the banking book irrbb and pension risk. 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. In contrast to conventional wisdom, net worth is increasing in interest rates. Interest rate risk in the banking book pdf file, 739.
Earning risk earning risk is related to a bank s net income, which is the last item on the income statement. Investors need to know which ones will best serve their needs in todays dynamic bond market. 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. Basel committee interest rate risk in the banking book pdf file, 67. 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. Mar 28, 2012 interest rate risk in the banking book.
Banks exposure to interest rate risk is small on aggregate, but heterogeneous in the crosssection. Assess the adequacy of controls relative to the types of data inputs used manual. Interest rate risk in the banking book irrbb is currently part of the basel capital. Registrant may not transfer or assign this contract or any interest in it without the prior written consent of marcus evans. 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 positions in the banking book. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Bcbs proposals for interest rate risk in the banking book irrbb. What is the difference between a banking book and a. Houpt, of the boards division of banking supervision and regulation, prepared this article. An historical example of a banking crisis where interest rate risk played an integral role is the savings and loan crisis. Financial sector assessment program detailed assessment of observance on the basel core principles for effective banking supervision this detailed assessment of observance on the basel core principles for effective banking supervision on the united kingdom was prepared by a staff team of the international monetary fund. Introductionin general, banks financial situation is sensitive to fluctuations in market interest rates. Interest rate risk is the exposure of a banks current or future earnings and capital to adverse changes in market interest rates.
Leeto tlou and jonathan hacker provided assistance. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. Interest rate risk office of the comptroller of the currency. An analysis of commercial bank exposure to interest rate risk david m. Guidelines on the management of interest rate risk arising.
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