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. Any changes in interest rates have an impact on the present value of future cash flows on the bank. The precise answer is both complex and involves considerable latitude for opinion. The panel of participating banks was a balanced mix of significant entities under ecb. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and. This booklet applies to the occs supervision of national banks and federal savings associations. Deutsche bank annual report 2017 nontrading market risk.
It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. Interest rate and rate of return risk in the banking book regulation. Overview interest rate risk in the banking book irrbb. 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 is an integral part of banking business, and may even be a. 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. 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, written by industry expert paul newson, provides a thorough guide to the new regulatory requirements surrounding irrbb and demonstrates the importance of good governance.
As interest rates rise bond prices fall, and vice versa. This includes gap risk, which arises from the term structure of banking book instruments, basis risk, which describes the impact of. 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. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016.
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. 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. Use features like bookmarks, note taking and highlighting while reading interest rate risk in the banking book. The risks covered by the original guidelines are commonly referred to as interest rate risk in the banking book hereinafter irr. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading 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 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.
Vice president, interest rate risk in the banking book. Interest rate risk in banking book masterclass bizenius. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Implementing bcbs 368 interest rate risk in the banking book in. 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 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. 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.
The reserve bank of india has today placed on its website the draft guidelines on interest rate risk in 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. Interest rate risk in the banking bookresponses of participating banks were collected on an individual basis through an online survey3 and then combined in order to produce a consolidated view4. 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. Interestrate risk in the banking book irrbb regtech. What is the difference between a banking book and a. The treatment of automatic options under the standardized approach brings. Interest rate risk in the banking book marcus evans. Hong kong monetary authority interest rate risk management. 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. 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.
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 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. Whitepaper interest rate risk in the banking book irrbb. Rbi invites feedbackcomments on the draft guidelines. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. 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. Interest rate risk in the banking book kindle edition by newson, paul. 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.
In recent years, interest rate risk in the banking book irrbb has. Interest rate risk in the banking book irrbb therefore reflects both the banks fundamental business model and its assetliabilitymanagement alm strategy. Registrant may not transfer or assign this contract or any interest in it without the prior written consent of marcus evans. 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. When interest rates change, the present value and timing of future cash flows change. Interest rate risk in the banking book how to manage. 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.
Proper conduct of banking business directive 1 5 management of interest rate risk page 3333 chapter 1 general foreword 1. 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 basel committee on banking supervision bcbs finalised its pillar 2 capital framework for interest rate. 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. Interest rate risk in the banking book irrbb share now 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. This white paper focuses on understanding how current market conditions low interest. Video would be covering about regulatory of interest rate risk in banking books. If a bank does an interest rate swap with a customer, thats trading book. 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. Whitepaper implementing interest rate risk in the banking. 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 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.
Guidelines on the management of interest rate risk arising. Basel iv revised trading and banking book boundary for. What is interest rate risk in the banking book irrbb. Calculating interest rate risk in the banking book. The management of interestrate risk in the banking book irrbb has been increasing in importance since 2004, shown by the increased frequency and scale of regulatory requirements. 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. Cembra money bank ag the bank, together with its subsidiaries. Interest rate risk in the banking book how to manage irrbb considering the monetary policy and the new regulation. The feedbackcomments on the proposals contained in this document may be sent to the following address by march 3, 2017 electronic submission is encouraged. 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. 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. 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. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. 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.
Download it once and read it on your kindle device, pc, phones or tablets. Revised trading and banking book boundary for market risk presumed assignment to the trading book alternative allocation possible through explicit supervisory approval there is a general presumption that any of the following instruments are being held for at least one of the above. Vice president, interest rate risk in the banking book, business support and analysis team team the individual will work in interest rate risk irr team within citis corporate treasury. 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. 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. Standards on the interest risk in the banking book irrbb.
Should the interest increase with 1 bp pv01 i, the stressed components are then multiplied, for each maturity i, with the pv01s that capture the value loss for cash flows with maturity i. 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 is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer. 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 disclosures as per 30 june 2019. Interest rate risk in the banking book irrbb definition. Interest rate risk in the banking book marcel bluhm.
The analytical var for interest rate risk in the banking book can be calculated as follows. Article interest rate risk in the banking book irrbb fis. Interest rate risk in the banking book irrbb bankinghub. 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 adeva partners.