Interest rate risk in the banking book 2019 5th annual. Whitepaper implementing interest rate risk in the banking. Its aim is to identify earnings volatility over a 12monthhorizon against the two. Interest rate risk in the banking book irrbb is part of the basel capital. 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 the banking book in 2015, two documents were published that will have a significant impact on the risk management framework of banking institutions. 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 the main items included in the banking book are loans and. Appropriate capital allocation for irrbb in the future needs to consider inter est rate risk from portfolios evaluated at fair value through other. Sensitivity analysis of irrbb stress test 2017 final. Calculating interest rate risk in the banking book. Interest rate risk in the banking book irrbb 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.
Interest rate risk in the banking book how to manage. These guidelines set out highlevel guidance, addressed to both credit institutions and investment firms, related to interest rate risk arising from non trading. This is known as interest rate risk in the banking book or irbb. Lastly, eba favours the usage of a wide range of quantitative tools and models instead of relying on a single measure of risk, to assure that all aspects within the interest rate risk are addressed. Interest rate risk in the banking book zanders treasury. Basel committee guidance a bit of history 1993 consultative paper on measuring banks exposure to interest rate risk 1997 principles for interest rate risk management in both. Excessive irrbb can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately. Risk in the banking book csrbb defined by the european banking authority eba guidelines on the management of interest rate risk arising from nontrading book activities context in april. Final bcbs standards on interest rate risk in the banking. In mid2019, the new guidelines will replace the previous eba.
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 the main. 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. Guidelines on the management of interest rate risk arising. There are new rules for an appropriate assessment of the interestrate risk of new products in the banking book e. Ebagl201802 on the management of interest rate risks kpmg. Guidelines on the management of interest rate risk arising from. For a larger andor more complex firm, appropriate systems to evaluate and manage interest rate risk in the nontrading book should 2include 2 1 the ability to measure the exposure and sensitivity of the firms activities, if material, to repricing risk, yield curve risk, basis risk and risks arising from embedded optionality for example, pipeline risk, prepayment risk as well as2changes. In mid2019, the new guidelines will replace the previous eba irrbb guideline published in 2015. 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. Interest rate risk in the banking book irrbb definition. Book irrbb guidelines are the first step in implementing the basel. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision. Interest rate risk in the banking book irrbb june uk. Eba technical guideline on interest rate risk in the.
Interestrate risk in the banking book irrbb regtech. 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. Jan 31, 2018 while we agree that qualitative aspects of the basel committee on banking supervision bcbs standards n368 on interest rate risk in the banking book irrbb could be factored in eba guidelines, we believe such guidelines should not factor in any quantitative components while they are being discussed by the european legislators. Financial services risk and regulation highlights the eba s final interest rate risk in the banking book irrbb guidelines are the first step in implementing the basel committees 2016 irrbb. 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. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or prospective risk to a banks capital. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016. Enhanced requirements for irrbb management insights from ey european irrbb survey 2016 for banks 1 historically, interest rate risk in the banking book irrbb has been a risk to which many in the market have paid less attention compared to liquidity risk and credit risk. Financial services risk and regulation highlights the eba s final interest rate risk in the banking book irrbb guidelines are the first step in implementing the basel committees 2016 irrbb standards at the eu level, and include a number of important changes.
Interest rate risk in the banking book irrbb bankinghub. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. Eba technical guideline on interest rate risk in the banking. Risk in the banking book csrbb defined by the european banking authority eba guidelines on the management of interest rate risk arising from nontrading book activities context in april 2016, the basel committee on banking supervision bcbs published the standards on interest rate risk in the banking book1 irrbb. Interest rate risk in the banking book tickets, mon, sep.
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. 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. Interest rate risk in the banking book tickets, mon, sep 21. Andreas dombret, member of board, deutsche bundesbank in. Bcbs standard for interest rate risk in the banking book. Addressing interest rate differentials between currencies and the management of net interest income in relation to basel eba. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Zinsanderungsrisiken im anlagebuch deloitte deutschland. 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. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb.
Interest rate risk in the banking book irrbb march uk. In this context, the maximum loss under all scenarios in relation to the core capital cet1 is the key metric. 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. The new basel committee on banking supervision bcbs standards for irrbb come into force. However, a new requirement is the obligatory application of the six bcbs scenarios. 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. On 19 july 2018, the european banking authority eba published the new guideline on the management of interest rate risks in the banking book irrbb. The draft of the new circular is related to the eba guidelines for managing the interest rate risk on transactions in the banking book, which were published in 2015. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Eba publishes final guidelines on interest rate risk in the banking book. 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.
European banking industry common understanding of credit. Irrbb guidelines ebf reaction to eba consultation ebf. 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 requirements directive directive. 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 rates that affect banking book positions. 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. The analytical var for interest rate risk in the banking book can be calculated as follows.
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. Interest rate and capital risk for a fastgrowing uk. Interest rate in the banking book 2019 5th annual european summit. Interest rate risk in the banking book is too dependent on the specific characteristics of institutions to enable a formalized capital requirement. 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.
What is interest rate risk in the banking book irrbb. Managing interest rate risk in the banking book actively manage interest rate risk, improve frameworks and advance behavioural models under the eba s 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 basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Scenarios once the scope of the interest rate risk method has been determined, then consideration can be given to the scenarios with interest rate shocks that will be used in the. 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. Banks need to strike a balance between longterm and shortterm indicators that is aligned with the overall risk profile of the particular banks and at the same time avoiding potential. Bafin consults on circular on interest rate risk in banking book.
Agenda interest rate in the banking book 2019 5th annual. Bafin in germany, have had to back part of the assumed risks directly with equity in. Enhanced requirements for irrbb management insights from ey european irrbb survey 2016 for banks 1 historically, interest rate risk in the banking book irrbb has been a risk to. Bcbs proposals for interest rate risk in the banking book irrbb. 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. When interest rates change, the present value and timing of future cash flows change. Mar 16, 2020 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. 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.
A comprehensive overview of the bcbs irrbb standards published in april 2016, comparison with eba standards and a refresher of the mathematical tools required. Draft rts on the treatment of nontrading book positions. Avantage reply interest rate risk in the banking book 2015 qis, february 2015 page 3 interest rate risk in the banking book 2015 qis february 2015 measurement. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Interest rate risk in the banking book irrbb march. 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. 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. Value of equity eve and net interest income nii risk measures.
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. It is important to note the advantage of using independent principal components. As before, banks need to calculate the present value effect of a 200 bp interest rate shock on the banking book based on riskfree discount curves. How bcbs 368 will affect alm 3 distinction is useful from a management and treasury perspective too see below. A firms record of its approach to evaluating and managing interest rate risk. Sensitivity analysis of irrbb stress test 2017 final results. Guidelines on technical aspects of the management of.
Managing interest rate risk in the banking book actively manage interest rate risk, improve frameworks and advance behavioural models under the eba s final irrbb guidelines to steer. Guidelines on technical aspects of the management of interest. Excessive irrbb can pose a significant threat to a banks current capital. 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. Bafin consults on circular on interest rate risk in. 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. There are new rules for an appropriate assessment of the interest rate risk of new products in the banking book e. Guidelines set the eba view of appropriate supervisory practices within. Implementation is scheduled for 30 june 2019, with transitional arrangeme nts for. 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 this context, the maximum loss under all scenarios in relation to the core capital. 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. 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. 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.
Irrbb interest rate risk in the banking book a bearingpoint accelerator eba and the basel committee reacted to the. Standards on the interest risk in the banking book irrbb. Guidelines on technical aspects of the management of interest rate. 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. 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. A controversial cap on the estimated duration of deposits in bank interest rate risk calculations has been eased in new guidelines published by the european banking authority eba today. The european banking authority eba launched today a consultation on draft regulatory technical standards rts on how institutions should calculate the own funds requirements for market risk for their nontrading book positions that are subject to foreignexchange risk or commodity risk under the frtb standardised and internal model approaches. Whitepaper interest rate risk in the banking book irrbb. Also multiple interest rate shock scenarios are encouraged.
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