There are all sorts of advanced mathematical tools, analytics and. Monetary authority of singapore mas notice 637 14 september 2012 last revised on 31 december 20 notice to banks banking act, cap 19 notice on risk based capital adequacy requirements for banks. 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. Interest rate risk in the banking book marcus evans. Dr andros gregoriou lecture 11, commercial bank risk management 1 bs2551 money banking and finance commercial bank risk management need for risk management increased complexity of risks faced by banks since 1970s due to. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios.
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. An organizations operating reserve ratio can be calculated in terms of a. This paper investigates the size and development of dutch banks interest rate risk positions in the banking book during the period from 2008 to 2015. The seminal guide to risk management, streamlined and updated. 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 irrbb overview interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. Whitepaper interest rate risk in the banking book irrbb. Launched in 1999, it operates as a memberowned nonprofit entity. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. In april 2016, bcbs issued standards for interest rate risk in the banking book. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. The foremost among the challenges faced by the banking sector today is the challenge of understanding and managing the risk.
Interest rate risk in the banking book deloitte south africa. The banking book is a term for assets on a banks balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. Lending through kiva involves risk of principal loss. 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. The very nature of the banking business is having the threat of risk imbibed in it. Mas issues mas notice 637 with changes relating to eligible.
The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk or differentially by period nonparallel risk. Top 7 best risk management books risk management has always been a critical area for the financial industry but it has acquired a newfound meaning in the post2008 credit crunch era as an increasing number of financial institutions are willing to go that extra mile to ensure they understand the element of risk well enough. The new basel committee on banking supervision bcbs standards for irrbb come into force. 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. On 9 january 2017, mas consulted on proposed amendments to the capital framework for interest rate risk in the banking book irrbb in. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate 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. Risk management in bank operations includes risk identification, measurement and assessment, and its objective is to minimize negative effects risks can have on the financial result and capital of a bank. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Excessive levels of interest rate risks in the banking book can pose a significant threat to an institutions earnings and capital base.
Interest rate risk in the banking book irrbb masterclass. What is interest rate risk in the banking book irrbb. Interest rate risk in the banking book monetary authority of. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. 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. This risk includes foreign currency risk, which is defined as the actual or potential risk that affects results or capital as a result of adverse changes in exchange rates in the banking book. Nov 04, 2016 this paper investigates the size and development of dutch banks interest rate risk positions in the banking book during the period from 2008 to 2015.
Competition and deregulation asset price volatility e. Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. At worst, there could be an opportunity loss, but always. 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. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking institutions. Recall that the interest rate risk on the banking book are within pillar 2 and as such they are not linked to banks capital requirements. Bank profitability and risk taking in a prolonged environment. Interest rate risk positions are rather modest and the income from maturity transformation it generates is only a. Interest rate risk is an integral part of banking business, and may even be a source of profit. The bba delivers an extensive programme of events for those in banking and the related financial and professional services sectors in the form of conferences, seminars and briefings that put you at the heart of the latest developments in your industry. More importantly, the fact that credit spreads play an.
Any changes in interest rates have an impact on the present value of future cash flows on the bank. It focuses on the assessment of market risk on a whole without separating the trading book and the banking book. Uniform financial institutions rating system trading and capitalmarkets activities manual. 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 the banks banking book positions.
However, they do not explicitly consider interest rate risk exposure and focus on the. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift. Now in its fourth edition, this useful guide has been updated with the latest information on alm, basel 3, derivatives, liquidity analysis, market risk, structured products, credit risk, securitizations, and. 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. Framework for securitisation exposures and interest rate risk in the banking book in mas notice 637 monetary authority of singapore 4 considers it not in the public interest to do so, such as where the submission appears to be libellous or offensive. The proposed framework for interest rate risk in the banking book irrbb, to take effect from 31 december 2017, sets out pillar 2 requirements for the identification, measurement, monitoring and control of irrbb, and disclosure requirements under prescribed interest rate shock scenarios.
Operating reserve policy toolkit for nonprofit organizations. Now in its fourth edition, this useful guide has been updated with the latest information on alm, basel 3, derivatives, liquidity analysis, market risk, structured products, credit risk, securitizations, and more. Sep 17, 2004 over the past 20 years, financial institutions have made significant efforts to establish and improve their procedures for interest rate risk management, including using economic models of interest rates and related models of credit risk lopez 2001a, b. The bba has a longstanding reputation for highquality and relevant industryfocused events. 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. Protect against interest rate fluctuations, add flexibility to your debt financing and better manage cash flows, using the most appropriate products. The basel comittee on banking supervision bcbs made new guidelines for regulations available in april 2016. The monetary authority of singapore is singapores central bank and financial regulatory. Over the past 20 years, financial institutions have made significant efforts to establish and improve their procedures for interest rate risk management, including using economic models of interest rates and related models of credit risk lopez 2001a, b. Khalid omar alkharji central bank of the united arab emirates. Institutions will minimize the effect of higher cost and less revenue to ensure they maintain strong profits in the new economic environment. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. This is an excellent treatise on risk management elucidating the nature of financial risks faced by businesses and ways of effectively handling them. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016.
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. Risk analysis and risk management has got much importance in the indian economy during this liberalization period. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. The low interest rate environment has made interest rate in the banking book irrbb an interesting topic.
Interest rate risk in the banking book irrbb definition. Accepting this risk is a normal part of banking and can be an important source of pro. Risk management in banking is a comprehensive reference for the risk management industry, covering all aspects of the field. Whitepaper implementing interest rate risk in the banking. 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 management of interest rate risk is therefore critical to the stability of any banking corporation. The following diagrams are meant to illustrate the risk management process and the types of. At the same time, bank supervisors worldwide, including the federal reserve, have been expanding their knowledge and oversight of interest. 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.
Risk measurement in banking do you know any examples of. Sources of irrbb include interest rate gaps, basis risk, yield curve risk and option risk. The mas decided to ease the singapore dollars appreciation rate to zero percent. When the financial institutions policy group issues a clear policy on capital charge for market risk, this manual will be duly amended.
Monetary authority of singapore mas notice 637 14 september. This impacts the underlying value of the banks assets. This gfmi conference will allow financial institutions to discuss the best strategies to manage interest rate risk in the banking book and capitalize on new rates, whilst maintaining the level of funding. Interest rate risk positions are rather modest and the income from maturity transformation it generates is only a small proportion of the net interest margin and the return on assets. 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. Regulation 30 directives and interpretations for completion of.
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. Irrbb includes potentially adverse effects on earnings, capital, or both. Subdivision 8 interest rate risk in the banking book subdivision 9 remuneration subdivision 10 composition of capital. Regulation 30 directives and interpretations for completion of monthly return concerning interestrate risk form. 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. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices.
Irrbb deals with the risks associated with a change in interest rates, and affecting a banks banking book, as opposed to its trading book. 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. Monetary authority of singapore mas notice 637 14 september 2012 last revised on 31 december 20 notice to banks banking act, cap 19. 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 tradeoff between delta eve and delta nii by philip j. In this risk management book, the author draws on lessons learned from the 2008 financial crisis and explains how shortcomings of traditional risk management were exposed during the financial crisis which led to a series of financial. 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. 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.
Inadequate measurement, management, and control of irrbb could. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. If a bank solely minimises its economic value risk by matching the repricing of its assets with liabilities beyond the short term, it could run the risk of earnings. Risk measurement in banking do you know any examples of classification for risk measurement. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk. Bichsel and perrez 2005 investigate how monetary policy affected bank lending in switzerland between 1996 and 2002. Stability institute, the basel committee on banking supervision or the bank for.