Basel committee consults on interest rate risk in the banking book

Bcbs is consulting on interest rate risk in the banking book irrbb. The consistency of implementation with some basel standards should be further improved. Its internal ratingsbased approaches to capital regulation will allow large banks to use their own credit risk models to set minimum capital requirements. Standards for interest rate risk in the banking book. Basel committee sets bank standards to manage interest. But with the rules likely to arrive as rates start to be hiked, theres a lot riding on the project. 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 lowinterest rate environment. The interest rate risk in the banking book can be measured and controlled at present value or periodically. Table irrbba interest rate risk in the banking book irrbb risk management objective and policies 2 template irrbb1 quantitative information on irrbb. Basel faces challenge on charge for interest rate risk in the. The new standards set out the committees expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision.

The basel committee proposes some clarifications on the scope of exposures that are subject to market risk capital requirements. Banks face tighter rules on interest rate risk in basel. Inadequate measurement, management, and control of irrbb could. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. In april 2016, bcbs issued standards for interest rate risk in the banking book. Interest rate risk in the banking book faq 7 whilst allowing firms to strike a compromise between net interest income sensitivity and economic value sensitivity that cannot be simultaneously cancelled out. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios. The standards, issued for the first time in more than a decade, introduced a strengthened pillar 2 approach and set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. Vthere certain financial instruments can be included in both trading and banking book, the committee clarifies the approach to identify which requirement trading vs banking book would take precedence. Oct 21, 2016 in april 2016, the basel committee on banking supervision bcbs published standards on interest rate risk in the banking book irrbb. In april 2016, the basel committee on banking supervision bcbs published standards on interest rate risk in the banking book irrbb.

Apr 28, 2016 the following statement was released by the rating agency london, april 28 fitch the basel committee on banking supervisions final standards on how banks should measure and control interest. In 2019, the bcbs has 45 members from 28 jurisdictions, consisting of central banks and authorities with responsibility of banking. 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. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. A response to the basel committees consultative document on. Basel committee on banking supervision said the risk posed by changes in interest rates is material, especially at a time when rates may normalize from historically low levels. 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. After several years of in depth 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. In 2019, the bcbs has 45 members from 28 jurisdictions, consisting of central banks.

The economic value ev has never been formally defined neither by the industry nor by the basel committee. 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. Basel committee on banking services bcbs financial. Local implementation of basel committee standards on. Basel cuts credit spread charge from banking book work. Foreign exchange risk and commodities risk for banking book instruments. Guidelines on technical aspects of the management of.

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 banking and trading books 2004 principles for the management and supervision of interest rate risk. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. 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. 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. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Basel committee on banking supervision launches consultation. Sep 14, 2015 cba comments on the basel committee on banking supervision consultative document on interest rate risk in the banking book irrbb posted on. The committees most recent release on this topic forms part of the proposed new basel capital accord. What is interest rate risk in the banking book irrbb. In determining its market risk for regulatory capital requirements, a bank may choose. 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. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016.

Basel committee sets bank standards to manage interest rate. Basel committee consults on interest rate risk in the banking book7 global, 8 june 2015 bis published a consultation to address risk management, capital treatment and supervision of interest rates in the banking book. 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. On june 8, 2015, the basel committee on banking supervision published a consultation paper on the risk management, capital treatment and supervision of interest rate risk in the banking book.

Archives bcbs basel committee on banking supervision. The new standard establishes an enhanced standardized methodology for comprehensive. Basel iv revised trading and banking book boundary for market. The basel committee on banking supervision bcbs has published a consultative document, 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. The committee expanded its membership in 2009 and then again in 2014. Interest rate risk in the banking book irrbb definition. A first irrbb consultation has been in the works since 2012, and is now expected in time for a june meeting of the basel committee, the sources. 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 consultative. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016. 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.

The new document expands upon and is intended to replace the basel committees 2004 principles for the management and supervision of interest rate risk, it said. Jun 10, 2015 on june 8, 2015, the basel committee on banking supervision published a consultation paper on the risk management, capital treatment and supervision of interest rate risk in the banking book. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of. The basel committee published new standards on interest rate risk in the banking book irrbb during april 2016. The new standards set out the committee s expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision. Bcbs consults on interest rate risk in the banking book.

Letter to eba on the implementation of the basel committee on. Basel committee consults on capital requirements and interest. The irr principles lay out the basel committees expectations for banks identification, measurement. Whitepaper a summary of bcbs interest rate risk in the. The basel committee on banking supervision has published a consultation on proposed revisions to the standard it published in january 2016 on the minimum capital requirements for market risk. Basel iv revised trading and banking book boundary for. 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. Standards on the interest risk in the banking book irrbb. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. 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.

Default risk, interest rate risk, credit spread risk, equity risk, foreign exchange risk and commodities risk for trading book instruments. The following statement was released by the rating agency london, april 28 fitch the basel committee on banking supervisions final standards on. Basel committee consults on capital requirements and. Basel iii implementation financial stability board. The new reporting standard has updated references to the prudential standard aps 117, which sets out the requirements that an authorized deposittaking institution with approval to use an internal. Jun 12, 2015 bcbs consults on interest rate risk in the banking book. Basel committee consults on interestrate risk bloomberg. 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. 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. Banks are required to comply with new basel irrbb standards beginning with the financial year ending december 31, 2017. Revised trading and banking book boundary for market risk 11 total sample. Apr 21, 2016 basel committee on banking supervision said the risk posed by changes in interest rates is material, especially at a time when rates may normalize from historically low levels. 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 basel committee on banking supervision has published a consultation on proposed revisions to the standard it published in january 2016 on the.

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. The basel committee on banking supervision bcbs is a committee of banking supervisory authorities that was established by the central bank governors of the group of ten countries in 1974. Basel committee consults on interest rate risk in 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, set to come into force from 2018. Final bcbs standards on interest rate risk in the banking. Basel ii represents a dramatic change in capital regulation of large banks in the countries represented on the basel committee on banking supervision. 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. Cba comments on the basel committee on banking supervision. Basel committee consults on interest rate risk in the banking. The standard published in january 2016 included a new definition of the boundary between a banks trading book and banking book, specifying those financial instruments that must be in either book.

The basel committee on banking supervision bcbs is monitoring closely the implementation of the reforms and will consider additional measures to improve implementation timeliness. A response to the basel committees consultative document. Interest rate risk in the banking book irrbb bankinghub. Apra updates reporting standard on interest rate risk in. Basel faces challenge on charge for interest rate risk in. 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. 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 risks subject to market risk capital charges include but are not limited to. Financial regulatory developments 12 june bank for. Letter to eba on the implementation of the basel committee.

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. Comments on the document can be made until 11 september. The basel committee recently published the revised standards for interest rate risk on the banking 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. The issue was felt to be adding too much complexity to the overhaul of muchdelayed rules on interest rate risk in the banking book irrbb. 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. 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 basel committee on banking supervision has issued a consultative document on the risk management, capital treatment and supervision of interest rate risk in. In the consultative document the bcbs sets out two options for the regulatory treatment of interest rate risk in the banking book irrbb. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Whitepaper 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. Riskbased capital framework bcbs has assessed all fsb jurisdictions.

It proposes changes, in line with pillar 2 of the basel capital. The standards have been enhanced with specific details on how to measure the risk on both. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interestrate risk in the bankingbook. The new document expands upon and is intended to replace the basel committee s 2004 principles for the management and supervision of interest rate risk, it said. Bcbs standard for interest rate risk in the banking book. Cba comments on the basel committee on banking supervision consultative document on interest rate risk in the banking book irrbb posted on. 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.