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. Standards on the interest risk in the banking book irrbb. 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 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 risk library. Unofficial translation this translation is for the. As interest rates rise bond prices fall, and vice versa.
Whitepaper implementing interest rate risk in the banking. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. Quoting from rbi guidelines, interest rate risk is the risk where changes in market interest rates affect a banks financial position. Interest rate risk exists in an interest bearing asset, such as a loan or a bond, due to the possibility of a change in the assets value resulting from the variability of interest rates. An analysis of commercial bank exposure to interest rate risk. 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.
Final bcbs standards on interest rate risk in the banking book. 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. 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 definition. 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 increase 35 interest rate decrease 36 1. 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. As a result, institutions are now in the process of finding ways to comply with impending regulations whilst seeing what the most effective ways of calculating, and minimising, risk are. Irrbb interest rate risk in the banking book a bearingpoint accelerator eba and the basel committee reacted to the current low interest environment with new or further detailed requirements for banks dealing with the risk arising from general banking business, known as interest rate risk in the banking book irrbb. Video would be covering about regulatory of interest rate risk in banking books. Get the authoritative reference on managing interest rate risk designed just for senior bank management. About deloitte deloitte refers to one or more of deloitte touche tohmatsu limited, a uk private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Relates only to a bank that calculates the relationship between interest rate movements or shocks and non interest income, bad debts and other relevant variables.
Any changes in interest rates have an impact on the present value of future cash flows on the bank. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. Interest rate risk management latest about banking. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off.
Details of types and interest rate risk impacts are in attachment 1. 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. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. 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. Leeto tlou and jonathan hacker provided assistance. Objective of the course interest rate risk in banking book irrbb objective of the course. Whitepaper interest rate risk in the banking book irrbb. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. What is interest rate risk in the banking book irrbb. Interest rate risk in the banking book deloitte financial. Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed rate investment. Interest rate risk in the banking book financial service deloitte.
Interest rate risk in the banking book irrbb is currently part of the basel capital frameworks pillar 2. The interest rate risk in the banking book can be measured and controlled at present value or periodically. 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. 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. Mar 28, 2012 interest rate risk in the banking book. 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. Investors need to know which ones will best serve their needs in todays dynamic bond market. T he management of interest rate risk should be one of the critical components of market risk management in banks. Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition. 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. 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.
The changes in interest rates impact a banks earnings i. Changes in interest rate affect earnings, value of assets, liability, offbalance sheet items and cash flow. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Houpt, of the boards division of banking supervision and regulation, prepared this article. Nov 11, 2016 irrbb interest rate risk in the banking book 1. 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. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. When interest rates change, the present value and timing of future cash flows change.
Feb 11, 2017 what is interest rate risk in banking book. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016. This risk is a normal part of banking and can be an important source of profitability and shareholder value. 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. 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.
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. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Final bcbs standards on interest rate risk in the banking. The interest rate risk in the banking book webinar emphazises the importance of this risk category in the alm management. Both papers combined will have a significant impact on how banks measure, monitor, hedge and manage their interest rate risk. Guidelines on technical aspects of the management of interest. Interest rate risk is an integral part of banking business, and may even be a source of profit. This in turn changes the underlying value of a banks assets, liabilities and off balance sheet items and hence its economic value. Interest rate risk in the banking book irrbb bankinghub. 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. Vice president, interest rate risk in the banking book. Department of banking regulation reserve bank of india, central office mumbai 400 001. 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.
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. Interest rate risk in the banking book irrbb therefore reflects both the banks fundamental business model and its assetliabilitymanagement alm strategy. The management of interest rate risk is therefore critical to the stability of any banking corporation. Learn more about applying for vice president, interest rate risk in the banking book, business support and analysis team at citi. Interest rate risk in the banking book news risktech forum. Interest rate risk is the exposure of a banks current or future earnings and capital to adverse changes in market interest rates. 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.
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. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. 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. 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. An analysis of commercial bank exposure to interest rate risk david m. 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.