The focus of the tga is to measure the level of a banks exposure to interest rate. Rbi issues draft guidelines on interest rate risk on. Bcbs standard for interest rate risk in the banking book. 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 deloitte financial. Risk in banking book irrbb refers to the current or prospective risk to. Leeto tlou and jonathan hacker provided assistance. Interest rate risk management at community banks community.
Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory. Interest rate risk in the banking book how to manage. 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. Interest rate risk in the banking book irrbb bankinghub. Interest rate risk in the banking book irrbb is currently part of the basel capital frameworks pillar 2. However, from an earnings point of view, there cannot be an interest rate loss from investing equity in fixed rate assets in order to stabilize earning flows. Interest rate risk in the banking book marcus evans. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. Irrbb refers to the existing or the future risk on the banks.
Interest rate risk is the exposure of a banks financial condition to adverse movements in interest rates. Quoting from rbi guidelines, interest rate risk is the risk where changes in market interest rates affect a banks financial position. 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 risk that assets and liabilities reprice or mature at different times, causing margins between interest income and interest expense to narrow. Guidelines on technical aspects of the management of. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability. 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.
Draft guidelines on governance, measurement, and management of interest rate risk in banking book statement on development and regulatory policies by rbi dated october 4, 2016 available from website. 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. 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. 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. We show empirically that banks exposure to interest rate risk or income gap. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. 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 invited european and south african banks to participate to an online survey to assess their current state of readiness against the new basel standards. 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. An analysis of commercial bank exposure to interest rate risk. Any changes in interest rates have an impact on the present value of future cash flows on the bank. However, excessive interest rate risk can pose a significant threat to a banks earnings and capital base. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital.
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. Whitepaper interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb definition. Interest rate risk is an integral part of banking business, and may even be a source of profit. These guidelines set out highlevel guidance, addressed to both credit institutions and investment firms, related to interest rate risk arising from nontrading activities irrbb. 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 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. 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. What is interest rate risk in the banking book irrbb. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. The interest rate risk in the banking book can be measured and controlled at present value or periodically. Rbi issues draft guidelines on interest rate risk on banking book. This risk is a normal part of banking and can be an important source of profitability and shareholder value.
Interest rate risk in the banking book how to manage irrbb. At worst, there could be an opportunity loss, but always. Interest rate risk in the banking book arises when there is a mismatch between the maturity profiles of rate sensitive assets rsa and rate sensitive liabilities rsl causes definition the risk to earnings or capital arising from the movement of interest rates interest rate risk in the banking book. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. Interest rate increase 35 interest rate decrease 36 1. Irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect. 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. An analysis of commercial bank exposure to interest rate risk david m. While interest rate risk can arise from various sources, four key types of interest rate risk are common to community bank balance sheets. On 2 february 2017, the rbi came up with draft guidelines focusing on the. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Department of banking regulation reserve bank of india, central office mumbai 400 001. Rbi issues draft guidelines on interest rate risk management. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
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. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. Rbi has released the guidelines on irrbb interest rate risk in bank books. Investors need to know which ones will best serve their needs in todays dynamic bond market. Excessive irrbb interest rate risk on banking book can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately, the rbi said. Interest rate risk in banking book irrbb refers to the current or prospective risk to. 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 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. This creates interest rate risk, which, in the case of banks, is the risk that interest rates will rise, causing the bank to pay more for its liabilities, and, thus, reducing its profits.
Interest rate risk management latest about banking. Whitepaper implementing interest rate risk in the banking. Nov 11, 2016 irrbb interest rate risk in the banking book 1. 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.
This impacts the underlying value of the bank s assets. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. If passages have been quoted from the original, credits have been given. Pdf interest rate risk and bankspecific characteristics. T he management of interest rate risk should be one of the critical components of market risk management in banks. Interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution, respectively. 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. When interest rates change, the present value and timing of future cash flows change. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Pdf interest rate risk management for commercial banks in kenya. 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 management of commercial banks in. 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. Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition. 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. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios. 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. 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. Interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates.
The paper sets out supervisory expectations regarding the measurement, management and governance arrangements of irrbb and its reflection in the icaap. 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. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. 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. Interest rate risk is the exposure of a banks current or future earnings and capital to adverse changes in market interest rates. As per extant guidelines on management of interest rate risk in the banking book under pillar ii, banks where the economic value of the banking book declines by more than 20% of the mve as a result of a standardised interest rate shock of 200 basis points are considered outlier from supervisory perspective. 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. Details of types and interest rate risk impacts are in attachment 1.
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. 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. Mar 28, 2012 interest rate risk in the banking book understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book event start date. 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. 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. Annex draft guidelines on interest rate risk in banking book. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges.
Sep 08, 2010 interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. The reserve bank today released the draft guidelines on interest rate risk in banking book irrbb which stress on greater disclosures by. Managing interest rate risk in the banking book actively manage interest rate risk, improve frameworks and advance behavioural models under the ebas final irrbb guidelines to steer banks into the optimal position learn from key practical case studies mbank explore correct modelling of nonmaturing deposits and prepayment deposits for irrbb. The management of interest rate risk is therefore critical to the stability of any banking corporation.
Feb 11, 2017 draft guidelines on governance, measurement, and management of interest rate risk in banking book statement on development and regulatory policies by rbi dated october 4, 2016 available from website. Houpt, of the boards division of banking supervision and regulation, prepared this article. 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. Rbi releases draft guidelines on interest rate risk in banking book. Unofficial translation this translation is for the. Relates only to a bank that calculates the relationship between interest rate movements or shocks and noninterest income, bad debts and other relevant variables. The present rbi guidelines on irr require banks to carry out both the analyses. Nairobi securities exchange for the period 20082012. Guidelines on technical aspects of the management of interest. 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. Andreas dombret, member of board, deutsche bundesbank in. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2.
This white paper focuses on understanding how current market conditions low interest. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading 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. Video would be covering about regulatory of interest rate risk in banking books.
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