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. Interest rate risk in the banking book irrbb definition. 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. Interest rate risk in the banking book news risktech forum. Cba comments on the basel committee on banking supervision. 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. Inadequate measurement, management, and control of irrbb could. The basel committee on banking supervision bcbs finalised its pillar 2 capital framework for interest rate risk in the banking book irrbb in april 2016. 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.
In october 2017, eba has revised its framework accordingly to bcbs instructions and published the related new standards in consultation. Interest rate risk in the banking book irrbb more specifically refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in interest rates affect the institutions banking book that positions. Implementing bcbs 368 interest rate risk in the banking book. Interest rate risk in the banking book deloitte financial services. Whitepaper a summary of bcbs interest rate risk in the. In april 2016, the basel committee on banking supervision issued standards for interest rate risk in the banking book irrbb.
Differences between interest rate risk irr in the banking. Interest rate risk is a bank s exposure to adverse movements in interest rates. Its implementation is set as 1 january 2016, however, in june the basel committee for banking supervision bcbs published a consultative document cd on the interest rate risk in the banking book irrbb. Interest rate risk is a banks exposure to adverse movements in interest rates. This is known as interest rate risk in the banking book or irbb. 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 forthcoming capital requirements directive crd 5 and capital requirements regulation crr 2 implement the bcbs standards in the regulatory framework of the european union. 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. However, the banking industry has asked for further clarification of how supervisors will view interest rate risks.
Standards for interest rate risk in the banking book. Basel committee on banking supervision standards interest rate risk in the banking book. We also believe that some adjustments to the basel committee on banking supervision s bcbs standards disclosure requirements should be considered to ensure the provision of valuable public information. 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. The final standard details twelve principles for the management, control, and supervision of irrbb, based on pillar 2 of basel iii. The new framework replaces its previous version from 2004 and sets out nine principles for banks and three principles for supervisors for the management and supervision of irrbb. This document, together with the document basel iii. 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. According to a report by the basel committee on bank supervision bcbs, the reserve bank of india has fallen short of meeting tougher requirements set by the basel iii norms. Bcbs standard for interest rate risk in the banking book. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. The accord will also apply to all internationally active banks at every tier within a banking group, also on a fully consolidated basis see illustrative chart at the end of this section.
Basel committee on banking supervision launches consultation. 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. These standards apply to internationallyactive institutions. A summary of bcbs interest rate risk in the banking book. Introduction in april 2016, the basel committee on banking supervisionbcbs issued final standards on irrbb that replace the 2004 principles for the management and supervision of interest rate risk. Dec 16, 2019 home submissions interest rate risk in the banking book 16 december 2019 the aba supports the alignment of aps 117 with the basel committee on banking supervision interest rate risk in the banking book issued april 2016 where appropriate. Does prudential regulation contribute to effective measurement and. The basel committee on banking supervision published the standard on interest rate risk in the banking book irrbb in 2016, which includes the detailed standardized framework for measuring the irrbb. A global regulatory framework for more resilient banks and banking systems. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. Introduction interest rate risk in the banking book or irrbbas defined by the basel committee is the current or. Reassessment of the boundary between the trading book and the banking book. Basel committee on banking supervision consultative document. But with the rules likely to arrive as rates start to be hiked, theres a lot riding on the project.
Final bcbs standards on interest rate risk in the 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. In july 2004, the basel committee on banking supervision released the final version of its principles for the management and supervision of interest rate risk. The bcbs updated its guidance in 2016 by issuing interest rate risk in the banking book irrbb. Board of the international organization of securities commissions margin requirements for noncentrally cleared derivatives. 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. Under the present regime a key determinant of the regulatory boundary between banking book and trading book exposures is the bank s intention to trade. The basel committee released in april 2016 its new directive d368 interest rate risk in the banking book irrbb. 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. Basel committee on banking supervisions consultative.
In developing these principles, the committee drew on supervisory guidance in member countries, on the comments of the banking industry on the committee. The basel committee on banking supervision bcbs finalised its pillar 2 capital framework for interest rate. Interest rate risk in the banking book irrbb bankinghub. A new methodological framework to estimate banks interest rate risk is proposed. Home submissions interest rate risk in the banking book 16 december 2019 the aba supports the alignment of aps 117 with the basel committee on banking supervision interest rate risk in the banking book issued april 2016 where appropriate. 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. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase.
Standards on the interest risk in the banking book irrbb. The basel committee on banking supervision the committee is monitoring the impact of basel iii. Basel committee on banking supervision june 2006 international convergence of capital measurement and capital standards a revised framework comprehensive version this document is a compilation of the june 2004 basel ii framework, the elements of the 1988 accord that were not revised during the basel ii. 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. Feb 27, 2017 april 2016 saw the basel committee on banking supervision bcbs publish its updated standards for interest rate risk in the banking book irrbb, standards which mark a course correction for the. Interest rate risk irr is defined as the change in a bank s portfolio value due to interest rate fluctuations.
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. Whitepaper interest rate risk in the banking book irrbb. As part of its ongoing efforts to address international bank supervisory issues, the basel committee on banking supervision the committee issued a paper on principles for the management of interest rate risk in september 1997. The bcbs published its standards on interest rate risk in the banking book irrbb in april 2016. 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. Interest rate risk in the banking book australian banking. 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.
Assessing supervisory scenarios for interest rate risk. The new standards set out the committee s expectations on the management of. The new standard for interest rate risk in the banking book. 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. This directive finally replaces the former text of july 2004 which was no more adapted from a methodological point of view but which was. The cbes board of directors ratified on the 3rd of october 2018 the issuance of the regulations of the management of interest rate risk in banking book irrbb, and banks are required to submit their financial position as of 30th september 2018 on a solo basis by those who do not have subsidiaries or foreign branches, while banks who belong to. Jan 14, 2019 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 framework. The guideline endorsed the guidance issued in 2004 by the basel committee on banking supervision bcbs through the principles for the management and supervision of interest rate risk. The final standard updated a set of principles laid out in 2004, to reflect changes in the market and supervisory practices.
When interest rates change, the present value and timing of future cash flows change. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. This began in june 2004 when the basel committee on banking supervision bcbs released the revised capital. Archives bcbs basel committee on banking supervision. 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. In april 2016, the basel committee on banking supervision bcbs published the final standard on capital framework for interest rate risk in the banking book irrbb.
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. Basel iv revised trading and banking book boundary for. 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. Basel faces challenge on charge for interest rate risk in the. 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. Home about fbf fbfs position risk control and prudential basel committee on banking supervision s consultative document on interest rate risk in the banking book irrbb overview management reports. Basel committee on banking supervision basel framework srp. This document sets out principles that should be used in evaluating the adequacy and effectiveness of a banks interest rate risk management, in assessing the extent of interest rate risk run by a bank in its banking book, and in developing the supervisory response to that risk. 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. Basel committee consults on interest rate risk in the banking. The report looked at adoption status of basel iii standards by 30 global systemically important banks gsibs as of endmay 2019. In 2016, the basel committee on banking supervision bcbs released its revised interest rate risk in the banking book standard.
The standards revise the committees 2004 principles for the management and. 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 on banking supervision consultative. 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 interestrate risk in the banking book. 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. International framework for liquidity risk measurement, standards and monitoring, presents the basel committee s1 reforms to strengthen global capital and liquidity rules with the goal of promoting a more. How will credit spread risk in the banking book be put. 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. These principles support the pillar 2 approach to interest rate risk in the banking book in the new capital framework. That means that no explicit capital charge will be calculated for this type of risk.
Basel committee finalizes longawaited market risk framework. In april 2016, the basel committee on banking supervision bcbs published the standards on interest rate risk in the banking book irrbb. 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. Implementing bcbs 368 interest rate risk in the banking book in. Letter to eba on the implementation of the basel committee on. 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. The committee expanded its membership in 2009 and then again in 2014.
Interest rate risk principles released by basel committee. Oct 21, 2016 in april 2016, the basel committee on banking supervision bcbs published standards on interest rate risk in the banking book irrbb. Basel committee on banking supervision board of the. 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. Letter to european commission on the implementation of the. Interest rate risk is covered in the new basel ii frameworkpublished at the end of junein the pillar ii section of the document. The basel committee on banking supervision has proposed two methods to set regulatory capital requirements for banks interest rate risk exposures within the banking book. 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. The standards revise the committee s 2004 principles for the management and supervision of interest rate risk. In face of the approaching deadline, interested and impacted parties have shared their comments on irrbb among which febelfin. 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. Principles for the management and supervision of interest.
The interest rate risk booklet applies to examinations of community banks. Bcbs proposals for interest rate risk in the banking book irrbb. The standards revise the committees 2004 principles for the management and supervision of interest rate risk. 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. First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. What is interest rate risk in the banking book irrbb. The basel committee on banking supervision defines credit spread risk in the banking book csrbb as any kind of assetliability spread risk of creditrisky instruments that is not explained by irrbb and by the expected creditjump to default risk, stating that csrbb is a related risk that banks need to monitor and assess in their interest rate risk management framework. Cba comments on the basel committee on banking supervision consulta tive document on interest rate risk in the banking book irrbb posted on. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. Whitepaper implementing interest rate risk in the banking. The new standards set out the committees expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision. The group of central bank governors and heads of supervision ghos approved today the long awaited basel committee for banking supervision s revisions to the market risk framework. Guidelines on the management of interest rate risk arising. 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.