Interest rate risk in the banking book irrbb definition. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk 4, which laid out the principles and. Following basel iii norms, central banks specify certain capital adequacy norms for banks in a country.
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. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. 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.
Bcbs proposals for interest rate risk in the banking book irrbb. Basel abandons plans for pillar 1 rates risk charge. 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 a banks balance sheet 1. Basel committee finalizes longawaited market risk framework.
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. Final bcbs standards on interest rate risk in the banking. 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. Differences between interest rate risk irr in the banking. The first day will look at the complexity of irrbb including sessions focusing on irr metrics, risk appetite and designing scenarios and sensitivity analysis. Article interest rate risk in the banking book irrbb fis. As per basel iii capital regulations, the bank is required to maintain a minimum capital to risk weighted assets crar of 10. Banks urged to set aside more capital for interest rate. Letter to eba on the implementation of the basel committee.
Introduction interest rate risk in the banking book or irrbbas defined by the basel committee is the current or prospective risk to a bank s capital and earnings, arising from adverse movements in interest rates that affect. However, the assets are valued at their book value and a write down in asset value happens only in case of defaults. On december 7th the basel committee for banking supervision has published its final documents on the reform of basel iii which are commonly referred to as basel iv. In 2016, the basel committee on banking supervision bcbs released its revised. Basel committee consults on interestrate risk bloomberg. Regulators take softer line on banks interest rate risk. 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 basel committee on banking supervision has dropped plans for a standardised capital charge for credit spread risk on loans, bonds and other assets held in the banking book. These standards apply to internationallyactive institutions. 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. 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. All you wanted to know about countercyclical capital. Issued in july 2004, this paper has the objective to support the pillar 2 approach to interest rate risk in the banking book within the basel ii capital. Banks face tighter rules on interest rate risk in basel.
This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. A surprising basel committee proposal a new capital charge for interestrate risk held in the banking book is set to challenge banks business models and will limit arbitrage opportunities. 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. What is interest rate risk in the banking book irrbb. Supervision bcbs, compared to the groups official capital planning, over a. Irrbb consultative paper on interest rate risk in the. This began in june 2004 when the basel committee on banking. Apr 21, 2016 banks face tighter rules on interest rate risk in basel revamp. The new basel committee on banking supervision bcbs standards. The bank must describe their risk management objectives and policies, including. Here the banks typically accept credit risk and interest rate risk.
The interest rate risk in banking book refers to the risk to a banks capital and. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016. The final standard details twelve principles for the management, control, and supervision of irrbb, based on pillar 2 of basel iii. Thus, feedback gained during the consultation phase is reflected in the final. In 2016, the basel committee on banking supervision bcbs issued new. Any changes in interest rates have an impact on the present value of future cash flows on the bank. The standards revise the committee s 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. The committee s most recent release on this topic forms part of the proposed new basel capital accord. Basel committee on banking supervision consultative. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
Although the bcbs did not retain a minimum capital requirement mcr. The intention is to improve trading book capital requirements. The amount of the interest rate risk is significantly influenced by the extent of the. The international standards do not apply to community banks. 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 basel committee on banking supervisions bcbs bid to standardize the treatment of interestrate risk in lenders banking books the firstever attempt to set a capital regime for interestrate risk internationally is encountering a wall of technical and principlesbased resistance. Basel committee says that as of june 2019, large banks. Dec 11, 2019 compliance with the basel committees standards on interestrate risk in the banking book bcbs 368 presents significant challenges to all banks with respect to measurement, calculation and hedging of interest rate risk, and this whole area is the subject of intense focus from the regulatory authorities. The new standards set out the committee s expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision. In the european union, irrbb is captured under the capital requirements. Basel committee sets bank standards to manage interest rate. Banks urged to set aside more capital for interest rate risk.
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. In april 2016, the basel committee on banking supervision published the final standard on capital framework for interest rate risk in the banking book irrbb. The group of central bank governors and heads of supervision ghos approved today the long awaited basel committee for banking supervisions revisions to the market risk. Basel committee raises flag over new interest rate capital.
Prior to covid19, large internationally active banks made further progress towards meeting fully phasedin final basel iii capital requirements. Interest rate risk in the banking book is the risk posed by adverse movements in. Basel committee on banking supervision consultative document. 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 irr is defined as the change in a bank s portfolio value due to interest rate fluctuations. 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 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. The basel committee is considering two approaches to increase the mandatory minimum of capital banks must hold to deal with the risk of interest rate. 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 new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. In april 2016, the basel committee on banking supervision bcbs issued final standards on. Whitepaper interest rate risk in the banking book irrbb. Conceptually, this risk is covered by pillar ii capital as part.
Basel iv revised trading and banking book boundary for market risk. The cccb is a part of such norms and is calculated as a fixed percentage of a bank s risk. Srp98 application guidance on interest rate risk in the banking book. 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. Interest rate risk in the banking book april 2016 basel committee basel committee on banking supervision calculation date the date with reference to which an adis irrbb capital charge is calculated, such that the exposures and observations of interest rates used in the calculation are recorded at the close of business on that day.
In april 2016, the basel committee on banking supervision bcbs issued final. First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the bank s capital and earnings arising from adverse movements in interest rates that affect the bank s banking book positions. The treatment of interest rate risk in our trading portfolios and the application of the valueat risk model is discussed in the trading market risk section of this document. In theory, banks could still be required to calculate and report a standardised capital number for banking book rates risk, with supervisors then being subject to guidelines that impel them to take action if the standardised and. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. Final bcbs standards on interest rate risk in the banking book. Interest rate risk in the banking book irrbb june uk. Interest rate risk in the banking book irrbb more specifically refers to the current or prospective risk to the bank s capital and earnings arising from adverse movements in interest rates affect the institutions banking book that positions. Basel committee on banking supervision, interest rate risk in the banking book april 2016. Basel committee consults on interest rate risk in the. Basel iv revised trading and banking book boundary for market. Bcbs finalises reforms on risk weighted assets rwa the basel committee on banking supervisions announcement december 2017. The committee remains convinced that interest rate risk in the banking book is a potentially significant risk which merits support from capital basel ii, 762, basel committee, 2006.
Starting in 2012, the basel committee published several consultation papers on a. This is known as interest rate risk in the banking book or irbb. Interest rate risk in the banking book irrbb bankinghub. Basel committee on banking supervision said the risk posed by changes in interest rates is material, especially at a time. Basel to unveil pillar 1lite approach to rate risk. 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 a bank s balance sheet 1. Basel iv revised trading and banking book boundary for. The basel committee convened a working group in 2012. 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. Guidelines on technical aspects of the management of interest. Basel iii monitoring results based on endjune 2019 data published by the basel committee. Apr 21, 2016 london, april 21 ifr the basel committee has outlined new standards that banks should adopt for measuring interest rate risk in their banking books, set to come into force from 2018. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. A summary of bcbs interest rate risk in the banking book.
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. In april 2016, the basel committee on banking supervision bcbs issued final standards for irrbb that replace the 2004 principles for the management and supervision of interest rate risk. The new standards set out the committees expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision. See bcbs, international convergence of capital measurement and capital standards. Standards for interest rate risk in the banking book. Whitepaper a summary of bcbs interest rate risk in the. Regulators forge compromise on banking book rate risk.
In april 2016, the basel committee on banking supervision finalised a new. According to the revised risk based capital adequacy guidelines the bank requires general qualitative disclosure for each separate risk area e. In april 2016, the basel committee on banking supervision bcbs issued final standards on irrbb that replace the 2004 principles for the management and supervision of interest rate risk. Nov 28, 2016 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. Bankers will be caught offguard by this costly proposal, which some say ignores the fundamental difference between banks trading and banking books. Interest rate risk in the banking book consultative document. When interest rates change, the present value and timing of future cash flows. This document updated the guidance issued in 2004 principles for the management and supervision of interest rate risk to reflect changes in market. Most global banks have benchmarked their alm framework to the basel committee on banking supervision bcbs guidance principles for the management and supervision of interest rate risk. 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. Jun 08, 2015 the basel committee is considering two approaches to increase the mandatory minimum of capital banks must hold to deal with the risk of interest rate changes, or to allow banks to work out. 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. Basel committee on banking supervision, basel iii monitoring report december 2017 results of.
Apr 21, 2016 regulators take softer line on banks interest rate risk. Bcbs standard for interest rate risk in the banking book. In april 2016, the basel committee on banking supervision bcbs published standards on interest rate risk in the banking book irrbb. 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. The basel committee has finalised its standards pdf 1. The view expressed by the basel committee in the basel ii capital accord receives strong support. Treasury pool management hedges the transferred net banking book risk with deutsche bank s trading books within the cib division. Interest rate risk is a bank s exposure to adverse movements in interest rates. 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. Interest rate risk in the banking book irrbb refers to the current or prospective risk to a banks capital and to its earnings, arising from the. Management of interest rate risk in the banking book irrbb is starting to. Basel cuts credit spread charge from banking book work.
In april 2016, the basel committee on banking supervision issued interest rate risk in the banking book standards, which revise the 2004 principles for the management and supervision of interest rate risk. 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 environment. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk. 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. First public consultation expected this month in longrunning project first public consultation expected this month in longrunning project. Nontrading market risk deutsche bank annual report 2017. Deutsche bank annual report 2017 nontrading market risk. Osfi believes that the allocation of capital to risk is an integral.
When interest rates change, the present value and timing of future cash flows change. In april 2016, the basel committee on banking supervision bcbs issued final stan. Excessive irrbb can pose a significant threat to a bank s current capital base andor future earnings if not managed appropriately. Investment, market, operational, banking book interest rate risk, equity. The principles suggest supervisory guidelines for assessing the adequacy of interest rate risk management systems, such as focusing on banks internal control functions and stresstesting results.