This began in june 2004 when the basel committee on banking supervision bcbs released the revised capital. 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 irrbb is currently part of the basel capital frameworks pillar 2. Interest rate risk in the banking book marcel bluhm. Before these standards, the basel committee had issued guidance on interest rate risk management in their 2004 paper principles for the management and supervision of interest rate risk. Basel faces challenge on charge for interest rate risk in the. In face of the approaching deadline, interested and impacted parties have shared their comments on irrbb among which febelfin.
Interest rate risk in the banking book hong kong dollar. 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. Marcel bluhm hkma interest rate risk in the banking book 27 27. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a bank s capital and to its earnings, arising from the impact of adverse movements in interest rates on its banking book. Deutsche bank annual report 2017 nontrading market risk. 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. Compliance with the basel committees standards on interestrate risk in the banking book bcbs 368 and eba final report july. Mar 26, 2020 the interest rate risk booklet applies to examinations of community banks. Bcbs proposals for interest rate risk in the banking book irrbb. Guidelines on the management of interest rate risk arising. 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. 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. But with the rules likely to arrive as rates start to be hiked, theres a lot riding on the project. Without the prescriptive pillar i rules, irrbb practices have widely diverged across the industry.
Basel iv revised trading and banking book boundary for market. This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability. Interest rate risk in the banking book is too dependent on the specific characteristics of institutions to enable a formalized capital requirement. Implementing bcbs 368 interest rate risk in the banking book in. 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. Implementing bcbs 368 interest rate risk in the banking book in switzerland your contacts at pwc andrea martin schnoz director, assurance andrea. This new standard addresses not only a banks irrbb disclosures but also the. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios. The new basel committee on banking supervision bcbs standards for irrbb come into force. Interest rate risk in the banking book irrbb june uk finance. Implementing bcbs 368 interest rate risk in the banking book. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and. Such unconventional monetary policy has an impact on interest rates, and therefore, requires a closer monitoring of the interest rate risk in the banking book irrbb.
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. An examination of the banking crises of the 1980s and early 1990s, federal deposit insurance corporation. Interest rate risk in the banking book irrbb march uk finance. Interest rate risk in the banking book irrbb march uk. In april 2016, the basel committee on banking supervision published the final standard on capital framework for interest rate risk in the banking book irrbb. A summary of bcbs interest rate risk in the banking book. 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. Differences between interest rate risk irr in the banking. Interest rate risk in the banking book how to manage irrbb. This guidance note sets out the central bank of nigeria cbn specified principles and methods expected to be adopted by banks operating in nigeria for measuring, managing, monitoring and controlling interest rate risk in the banking book irrbb, as part of their internal capital adequacy assessment process icaap. The first day will look at the complexity of irrbb including sessions focusing on irr metrics, risk appetite and designing scenarios and sensitivity analysis. Interest rate risk in the banking book, bank for international settlements. Introduction interest rate risk in the banking book or irrbbas defined by the.
Andreas dombret, member of board, deutsche bundesbank in. Its implementation is set as 1 january 2016, however, in june the basel committee for banking supervision bcbs published a consultative document cd on the interest rate risk in the banking book irrbb. Following the publication in june 2016 of the new standards on interestrate risk in the bankingbook irrbb by the basel committee on banking supervision, the deloitte emea irrbbalm working group. What is interest rate risk in the banking book irrbb. Its implementation is set as 1 january 2016, however, in june the basel committee for banking supervision bcbs published a consultative document cd on the interest rate risk in the banking. For an adequate management of interest rate risk, a removal of this risk to the first pillar of the basel accord is necessary figure 7. Guidelines on technical aspects of the management of interest. An examination of the banking crises of the 1980s and early 1990s. Interest rate risk in the banking book is the risk posed by adverse movements in. Interest rate risk in banking book irrbb refers to the current or prospective risk. Interest rate risk in the banking book irrbb definition. 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.
Interest rate risk in the banking book deloitte financial. The final standard details twelve principles for the management, control, and supervision of irrbb, based on pillar 2 of basel iii. 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. He also works closely with uk alma having helped develop their new professional alm qualification, the certificate of. 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.
Whitepaper interest rate risk in the banking book irrbb. Revised trading and banking book boundary for market risk 11 total sample. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. 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. Due to the heterogeneous nature of this risk, it is captured in pillar 2. 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 significant challenges to all banks with respect to measurement, calculation, reporting and hedging of interest rate risk, as well as potential implications for pillar 2a capital requirement, and this.
Treatment of interest rate risk in the banking book in latin. Irrbb consultative paper on interest rate risk in the. The guideline endorsed the guidance issued in 2004 by the basel committee on banking supervision bcbs through the principles for the management and supervision of interest rate risk. At the same time, bank supervisors worldwide, including the federal reserve, have been expanding their knowledge and oversight of interest. This new standard addresses not only a banks irrbb disclosures but also the processes leading up to these revelations. Sep 17, 2004 over the past 20 years, financial institutions have made significant efforts to establish and improve their procedures for interest rate risk management, including using economic models of interest rates and related models of credit risk lopez 2001a, b. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. In the present value perspective, the risk is quantified as an economic value change of the total. When interest rates change, the present value and timing of future cash flows change. 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. Interest rate risk in the banking book irrbb june uk. 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. In 2018, the basel committees revised standard for interest rate risk in the banking book irrbb will be implemented. 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. 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.
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. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Hong kong monetary authority interest rate risk management. Video would be covering about regulatory of interest rate risk in banking books.
These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1. 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. Implementing bcbs 368 interest rate risk in the banking. The final basel standards allow supervisors to impose capital charges under. 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.
Oct 01, 2016 interest rate risk in banking book irrbb part ii good morning friends, welcome back, in this blog we will try to go through each of the principles mentioned in the recommendation, i have highlighted key words of each principle which will help you in case you want to get actually meaning of it. The european banking authority eba published today an updated version of the cebs guidelines on technical aspects of the management of interest rate risk arising from nontrading activities under the. 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. The bcbs updated its guidance in 2016 by issuing interest rate risk in the banking book irrbb. Whitepaper a summary of bcbs interest rate risk in the. Standards for 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 in the banking book zanders treasury. Rates expectations its no secret that bank regulators are looking to fill a gap in the capital framework by introducing a charge for interest rate risk in the banking book. The interest rate risk in the banking book can be measured and controlled at present value or periodically.
Calculating interest rate risk in the banking book. Interest rate risk in the banking book is too dependent. This guidance note sets out the central bank of nigeria cbn specified principles and methods expected to be adopted by banks operating in nigeria for measuring, managing, monitoring and. The basel committee on banking supervision bcbs finalised its pillar 2 capital framework for interest rate. 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 banking book masterclass bizenius.
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. This is known as interest rate risk in the banking book or irbb. 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. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018.
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