Guidelines on the management of interest rate risk arising from non trading book activities 4. In addition, the eba has decided to retain the minimum thresholds of 5 % for individual currency and minimum of 90 % of the total non trading book assets or liabilities for material currencies. On the other hand, the european banking authority, in its 2018 guidelines on the management of interest rate risk arising from nontrading book activities ebagl201802, defines csrbb as the risk driven by changes in the market perception about the price of credit risk, liquidity premium and potentially other components of creditrisky. General expectations for the identification and management of credit spread risk in the nontrading book csrbb.
Frtb proposed that each risk factor should be assigned a. Global markets interest rate risk is managed on the basis of trading book valueatrisk, as reflected in trading portfolio figures. Irrbb consultative paper on interest rate risk in the. Treasury pool management hedges the transferred net banking book risk with deutsche banks trading books within the cib division. This covers assets and liabilities in trading books, but also could include the market risk of assets and liabilities classified as available for. Irrbb interest rate risk arising from the banking book referred to in crd as interest rate risk arising from nontrading book activities. This booklet applies to the occs supervision of national banks and federal savings associations. Decision on the management of interest rate risk in the non. 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.
Differences between interest rate risk irr in the banking. The scope of irrbb is extended by the credit spread risk, non performing and offbalance sheet exposures. We undertook to comply with these guidelines with effect from 1 january 2016. The scope of irrbb is extended by the credit spread risk, nonperforming and offbalance sheet exposures. Frtb proposed that each risk factor should be assigned a liquidity horizon for. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. European banking industry common understanding of credit. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. The risk of loss due to a change in interest rates. If a bank does an interest rate swap with a customer, thats trading book.
The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Differences between interest rate risk irr in the banking and. Examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on. Deloitte alm survey of european banks practices 2019. Specialized work on interest rate risk modeling which explains the concept of interest rate risk and details the methodologies adopted for measuring and managing interest rate risk. This booklet provides an overview of interest rate risk comprising repricing risk, basis risk, yield curve risk, and options risk and discusses irr management practices. He has since returned to portfolio management in scandinavia at nordea markets specialising in euro irds as part of a linear and nonlinear product team. For a larger andor more complex firm, appropriate systems to evaluate and manage interest rate risk in the non trading 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. Nontrading market risk deutsche bank annual report 2017.
Deutsche bank annual report 2017 nontrading market risk. Term deposits, which are also subject to behavioral assump. The paper sets out supervisory expectations regarding the measurement, management and governance arrangements of irrbb and its reflection in the icaap. However, it requires firms to weight the positive changes by 50%. Banks provide their views on the regulators proposals to add interest rate risk in the banking book irrbb to the calculation. In such a transaction, the party receiving the floating rate will receive a smaller amount should the floating rate decrease. Basel iv revised trading and banking book boundary for market. Interest rate risk is important to transactions like interest rate swaps. Deutsche bank annual report 2016 nontrading market risk. Guidelines on the management of interest rate risk arising. Interest rate risk the risk of loss due to a change in. Interest rate risk in the non trading book will normally be a major source of risk for. Market risk is the potential loss of value in assets and liabilities due to changes in market variables e.
As interest rates rise bond prices fall, and vice versa. Interest rate risk is the risk to earnings and capital that market rates of interest may change unfavourably. The treatment of interest rate risk in our trading portfolios and the application of the valueatrisk model is discussed in the trading market risk section of this document. The eba has issued guidelines on the management of interest rate risk arising from nontrading activities. Jun 07, 2019 examples of the risk factors include interest rate, credit spreads, equity price, fx rate, energy price and so on. Pib 7 interest rate risk in the nontrading book rulebook. Decision on the management of interest rate risk in the nontrading. 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. Basel iv revised trading and banking book boundary for. All of this makes pricing and trading interest rate derivatives the goto text for both practitioners and academics alike.
How will credit spread risk in the banking book be put. What is the difference between a banking book and a trading. Guidelines on the management of interest rate risk arising from. Risk management and financial institutions john hull. Guidelines on the management of interest rate risk arising from nontrading book activities 4. Accepting this risk is a normal part of banking and can be an important source of pro. These guidelines set out highlevel guidance, addressed to both credit institutions and investment firms, related to interest rate risk arising from non trading. 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.
The precise answer is both complex and involves considerable latitude for opinion. Interest rate risk the chance that a securitys value will change due to a change in interest rates. A sudden parallel increase in yield curves would positively impact our earnings net interest income from our banking book positions. The risk that spread income will suffer because of a change in interest rates. Financial instruments in a trading book are purchased or sold for reasons including to. Management of interest rate risk on nontrading book activities. 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. We will supervise firms taking account of these guidelines. This period gave him the opportunity to complete his msc in mathematics and to author his first publication pricing and trading interest rate derivatives. Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixedrate investment.
Jan 14, 2016 apart from the bcbs consultative paper, the european banking authority eba published the final guidelines on the management of interest rate risk arising from non trading activities on may 22, 2015 becoming effective on january 1, 2016. Interest rate risk exposures currency code for official use only position of banking book trading book and banking book note 1 currency note 2. 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. The difference between the trading and banking book blogger. As such, this provides an opportunity for regulatory arbitrage. Eba guidelines on interest rate risk contents from non. Basel committee on banking supervision consultative. For the purposes of the guidelines, and the amendments proposed in this cp, interest rate risk arising from nontrading activities is referred to as interest rate risk in the banking book irrbb. Management of interest rate risk on non trading book activities. Background and timeline of developments in april 2016 the basel committee on banking supervision bcbs published. Market risk is defined as the risk that a financial position changes its value due to the change of an underlying market risk factor, like a stock price, an exchange rate, or an interest rate. Interest rate risk is an integral part of banking business, and may even be a source of profit. 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. Credit risk is defined as the risk that an obligor will not be able to meet its financial obligations toward its creditors.
For example, a bonds price drops as interest rates rise. 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. The book is essential reading for all those involved with interest rate risk in the banking book but particularly those working in a bank alm function who wish to gain a wider appreciation of the context in which they operate, more generalist and senior bankers who need a grasp of the fundamentals and those working in a trading risk function. This chapter introduces the concept of interest and market risk in a banking operation. The treatment of interest rate risk in our trading portfolios and the application of the valueatrisk model is discussed in the trading market risk section of. Whitepaper interest rate risk in the banking book irrbb. The guideline provides a risk control framework for managing interest rate risk to prudent levels at institutions. Osfis guideline incorporates most of the bcbs guidance to reflect changes in the market, the methods expected to be used by deposittaking institutions for measuring, managing and monitoring. Interest rate risk in the nontrading book will normally be a major source of risk for. 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. When interest rates change, the present value and timing of future cash flows change. Interest rate risk financial definition of interest rate risk. A trading book is the portfolio of financial instruments held by a brokerage or bank.
Jun 07, 2017 the precise answer is both complex and involves considerable latitude for opinion. Interest rate risk in the banking book irrbb is currently part of the basel capital. In april 2016, the basel committee on banking supervision bcbs published revisions to the framework for interest rate risk in the banking book irrbb. Nevertheless, in view of the importance of interest rate risk in the banking book, this directive specifically includes. These guidelines set out highlevel guidance, addressed to both credit institutions and investment firms, related to interest rate risk arising from nontrading activities irrbb. On the other hand, the european banking authority, in its 2018 guidelines on the management of interest rate risk arising from non trading book activities ebagl201802, defines csrbb as the risk driven by changes in the market perception about the price of credit risk, liquidity premium and potentially other components of creditrisky. Interest rate risk in the banking book irrbb definition.
Decision on the management of interest rate risk in the. This guideline is not contrary to the consultative paper of the bcbs, however there are some overlaps and. But almost anything could affect interest rates, so you focus on the macro on the rates trading desk. Interest rate risk in the nontrading book may arise from a number of sources for example. The eba has issued guidelines on the management of interest rate risk arising from non trading activities. Apr 12, 2020 interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed rate investment. Guidelines on technical aspects of the management of interest rate. With the interest rate risk of the banking book, the basel committee on. How will credit spread risk in the banking book be put into. Guidelines on technical aspects of the management of. Subject matter, scope and definitions subject matter and scope of application 5. Dubai financial services authority dfsa laws recognised jurisdictions and funds declaration notices. The trading book refers to assets held by a bank that are available for sale and. Additionally, it is suitable for those looking to either deepen their knowledge in the sector or for newcomers needing a solid foundation from which to learn.
Basel committee on banking supervision consultative document. 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. Pru 7 interest rate risk in the nontrading book rulebook. What is the difference between a banking book and a. Institutions should treat irrbb as an important risk and always assess it explicitly and. May risk weights be floored for interest rate and credit instruments when applying the risk weights for general interest rate risk girr or for credit spread risk csr, given that there is a possibility of the interest rates being negative eg for jpy, eur curves. 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. Risk in the banking book csrbb defined by the european banking authority eba guidelines on the management of interest rate risk arising from non trading 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. Guidelines on technical aspects of the management of interest. Pieter klaassen, idzard van eeghen, in economic capital, 2009. General expectations for the identification and management of credit spread risk in the non trading book csrbb. Interest rate risk is a banks exposure to adverse movements in interest rates.
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