Process to calculate the capital requirement under the sensitivitiesbased method. Banks use tools like duration and pv01 to calculate this risk. An enhanced pillar 2 approach was sketched out by the basel committee in its june 2015 consultation on interest rate risk in the banking book irrbb. The committee has also published pdf 607kb a helpful note explaining the gestation of the new market risk framework and the main changes introduced in the final version. An important announcement late last week the delay of basel iii by a year is a big help in achieving that. This document updated the guidance issued in 2004 principles for the management and supervision of interest rate risk to reflect changes in market and supervisory practices to be used by institutions for. Basel committee consults on interestrate risk bloomberg. Interest rate risk in the banking book irrbb is currently part of the basel capital. Standards for interest rate risk in the banking book. Thus, interest rate risk is inherent to the banking activity and its effective management impacts to institutions profitability. Tch comments on bcbs interest rate risk in the banking. In setting out the new rules, the basel committee said banks should also consider negative interest rate scenarios and the possibility of asymmetrical effects of negative interest rates. The irr principles lay out the basel committee s expectations for banks. Banks face tighter rules on interest rate risk in basel.
Basel abandons plans for pillar 1 rates risk charge. Standards on the interest risk in the banking book irrbb. 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. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. Introduction interest rate risk in the banking book or irrbbas defined by the basel committee is the current or. Basel committee consults on interest rate risk in the. Last april the basel committee issued its new standard on the interest rate risk in the banking book presenting a new standardized framework. 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. Occs interest rate risk booklet for bank examiners.
Eba guidance from 2015 allows banks to floor ratesdown shocks at 0 %. Changes in interest rates also affect a banks earnings by increasing or. First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. Interest rate risks in the banking book pose a material risk to many credit institutions. Basel committee on banking supervision consultative. What is interest rate risk in the banking book irrbb. On march 26, the occ issued bulletin 202026 announcing the revision of the interest rate risk booklet of the comptrollers handbook, which replaces the june 1997 version of the same name. 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.
In its longawaited consultation paper on interest rate risk in the banking book irrbb, published on june 8, the basel committee on banking supervision proposed a standardised capital framework the socalled pillar 1 approach alongside. Whitepaper interest rate risk in the banking book irrbb. In april 2016, the basel committee on banking supervision bcbs published the final standard on capital framework for interest rate risk in the banking book irrbb. Srp31 provides a standardised framework that banks may adopt as their ims. 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 the new standards are expected to replace this old guidance. Interest rate risk in the banking book hong kong monetary. 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.
Management of interest rate risk in the banking book irrbb is starting to receive much more attention, after a long period in which other regulatory and risk management issues dominated the headlines. As part of its ongoing efforts to address international bank supervisory issues, the basel committee on banking supervision the committee issued a paper on principles for the management of interest rate risk in september 1997. Following the publication in april 2016 of the new standards on interest rate risk in the banking book irrbb by the basel committee on banking supervision bcbs, deloitte invited european and south african banks to participate in an online survey to assess their current state of readiness against the new basel standards. Principles for the management and supervision of interest. The new standard establishes an enhanced standardized methodology for comprehensive. Interest rate risk in the banking book irrbb definition. The standards revise the committees 2004 principles for the management and supervision of interest rate risk.
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. Secretariat of the basel committee on banking supervision bank for international settlements ch4002 basel switzerland re. 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. Basel committee on banking supervision1 issued a paper on principles for the. London, april 21 ifr the basel committee has outlined new standards that banks should adopt for measuring interest rate risk in their banking books. Following the new bcbs framework, we propose to update the to 15% of tier 1 capital. Interest rate risk in the banking book deloitte south africa. Sensitivity analysis of irrbb stress test 2017 final. This chapter describes requirements on assessing interest rate risk in the banking.
Eba guidance on shocks is outdated, says ecb official. 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 management and supervision of the interest rate risk inherent in. Institutions ims for irrbb should be able to calculate the impact on economic value and. See bcbs, international convergence of capital measurement and capital standards. Banks will be required to calculate the counterparty credit risk charge for otc. In april 2016, the basel committee on banking supervision bcbs issued final standards on. Interest rate risk in the banking book irrbb refers to the current or prospective. In april 2016, the basel committee on banking supervision issued standards for interest rate risk in the banking book irrbb. 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 basel committee, which has banking supervisors from nearly 30 countries, published on thursday rules to overhaul how banks set.
Ims to calculate the irrbb exposure values, unless instructed by their national supervisor. Basel committee sets bank standards to manage interest. Calculate the impact oneve across all time bands for a given currency and. With all of that in mind, the basel committee primary global standard. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Basel faces challenge on charge for interest rate risk in. The basel committee has completed its standards for the capital treatment of market risk. Whitepaper implementing interest rate risk in the banking. Latest paper of implementing irrbb moodys analytics. When a bank hedges a banking book interest rate risk exposure using an. The basel committee on banking supervision has issued a consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book.
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. By analysing the balance sheet of a small italian bank during the years 2009 and 2010, we outlined its liquidity profile, the variables that influenced its dynamics and their effects on the banks global management, with particular attention to the interest margin and the interest rate risk in the banking book. 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. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. A response to the basel committees consultative document. The basel committee has finalised its standards pdf 1. The new standards will apply from january 2018 onwards but some supervisors have already given a lot of attention to how irrbb is monitored and managed at many banks, given the current concerns about the lingering low interest rate. A response to the basel committees consultative document on interest rate risk in the banking book by the british bankers association september 2015 introduction the bba is the leading association for uk banking and financial services representing members on the full range of uk and international banking issues. 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 the new standards are expected to. Eu could impose negative rate shocks via irrbb rules. In developing these principles, the committee drew on supervisory guidance in member countries, on the comments of the banking industry on the committee s earlier paper. Interest rate risk in the banking book irrbb refers to the current or. In 2016, the basel committee on banking supervision bcbs released its revised interest rate risk in the banking book standard.
Banks rebuff basel interestrate plan as fed increase. In april 2016, the basel committee on banking supervision bcbs published standards on interest rate risk in the banking book irrbb. Basel market risk standards finalised the basel committee has. Consistent with the scope of application of the basel ii framework, the. There are a range of issues associated with calculating irrbb, including data management, calculating the results and reporting results to regulators in the right format at the. Regulators forge compromise on banking book rate risk. The basel committee published new standards on interest rate risk in the banking book irrbb during april 2016. Letter to eba on the implementation of the basel committee. Regulators take softer line on banks interest rate risk. Basel committee raises flag over new interest rate capital. The clearing house association tch submitted a jointtrades comment letter to the bcbs in response to the consultative document entitled interest rate risk in the banking book. Interest rate risk in the banking book irrbb consists out of two parts. While the letter supports the basel committee s principal underlying policy goal, it expresses deep concern that the pillar 1 approach to irrbb described in the proposal would be counterproductive and.
Under the new bcbs standards, banks are required to calculate their irrbb exposures based on the impact on economic value of equity eve. Srp98 application guidance on interest rate risk in the banking book. Basel committee on banking supervision has proposed overhauling its rules on interest rate risk in banking books, including possible binding standards on how banks should measure their resilience. According to the basel committee on banking supervision, this is primarily because of the. In developing these principles, the committee drew on supervisory guidance in member countries, on the comments of the banking industry on the committee. Bankers will be caught offguard by this costly proposal, which some say ignores the fundamental difference between banks trading and banking books. 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 committee s 2004 principles for the management and supervision of interest rate risk. The formula for the general nii measure for currency. Table irrbba interest rate risk in the banking book irrbb risk management objective and policies. The revised booklet incorporates and reflects applicable statutes and. A surprising basel committee proposal a new capital charge for interest rate risk held in the banking book is set to challenge banks business models and will limit arbitrage opportunities. Basel capital requirements for derivatives 2 in general, the assessment of exposure at default for derivative transactions primarily depends on fluctuations in contract underlying market factors prices, interest rates, credit spreads which define market value of the contract, and, thus, exposure to the counterparty. Most jurisdictions follow this approach, which is based on.
But with the rules likely to arrive as rates start to be hiked, theres a lot riding on the project. Interest rate risk in the banking book irrbb risk management objective and policies 2. Basel committee on banking supervision, minimum capital requirements for. Comments in response to consultative document interest rate risk in the banking book ladies and gentlemen. Two risk management metrics ecbpublic the two metrics are discussed in detail in the eba guidelines on the management of interest rate risk arising from nontrading activities and in the bcbs standards on irrbb. Banks are required to comply with new basel irrbb standards beginning with the financial year ending december 31, 2017. Irrbb consultative paper on interest rate risk in the. After several years of indepth discussions amongst regulators as well as with the industry, the bcbs reaffirmed its previous, longstanding position that irrbb is more appropriately captured in a pillar 2. Principles for the management and supervision of interest rate risk. Basel iv revised trading and banking book boundary for.
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