Risk weighted assets 239,289 233,597 221,571 205,501 1 excludes interest rate risk in the banking book irrbb which was not effective until 1 july 2008. Revised trading and banking book boundary for market risk 19 fig. Irrbb consultative paper on interest rate risk in the. Disclosures under basel iii capital regulations 31st. In april 2016, the basel committee on banking supervision bcbs issued final. Excessive irrbb can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately. Basel capital rules for banks trading books will shift. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. Banks face global push to prepare for interest rate rise. Treatment of interest rate risk in the banking book in latin. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
Banks must disclose, among other requirements, the impact of interest rate shocks on. 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. Market is defined as the risk of losses in both onbalance sheet and off balance sheet positions arising from movements in market prices. The basel committee has published an accompanying explanatory note to provide a nontechnical description of the overall market risk framework, the changes that have been incorporated into in this version of the framework and impact of the framework. Interest rate risk in banking book irrbb refers to the current or prospective risk to a. 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. Recognition in consolidated common equity tier 1 capital of instruments and items that do. Basel ii pillar 3 personal banking including accounts. Banks need to ensure they can address all the requirements of the regulators whilst ensuring regulatory capital optimisation. The trading book is required under basel ii and iii to be marked to market daily. 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. Eba gl201508 and in 2016 the basel committee on banking supervision bcbs.
Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn. This began in june 2004 when the basel committee on banking. Supervisors should, on a regular basis, collect sufficient information from banks to be able to monitor. Prior to the crisis, the basel capital framework focused on shortterm market. The banks have to provide the capital charge for interest rate risk in the trading book other than derivatives as per the guidelines given below for both specific risk and general risk after measuring the risk of holding or taking positions in debt securities and other interest rate related instruments in the trading book. Interest rate risk in the banking book irrbb june uk finance. What is interest rate risk in the banking book irrbb. 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.
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. This white paper focuses on understanding how current market conditions low interest. 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. The difference between the trading and banking book blogger.
Interest rate risk, price risk and foreign exchange. 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. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. Business model determination and interaction with the overall risk profile. No, its total riskbased capital charge is greater than 0.
The results show that the capital charge augments under basel iii, except for interest rate risk. Basel iv revised trading and banking book boundary for. However, the assets are valued at their book value and a write down in asset value happens only in case of defaults. Any changes in interest rates have an impact on the present value of future cash flows on the bank. The tier one capital and total capital ratios as at 31 december 2008.
Regulators take softer line on banks interest rate risk. Such unconventional monetary policy has an impact on interest rates, and therefore, requires a closer monitoring of the interest rate risk in the banking book irrbb. The risks subject to market risk capital charges include. Minimum capital requirements for interest rate risk in the banking book irrbb. 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.
What is the difference between the trading book and the banking book of a bank. Instead, within the framework of pillar ii of basel ii, supervisors are asked to identify and monitor banks that run excessive. The committees most recent release on this topic forms part of the proposed new basel capital accord. This approach did not take the historic data into account and was very much focused on. Interest rate risk in the banking book irrbb under pillar 2 annex 11. With respect to interest rate risk on banking book, the accord puts in place a criteria for outliers. Interest rate risk, credit spread risk, equity risk, foreign exchange risk, commodities risk and default risk for trading book instruments.
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. Minimum capital requirements for market risk january 2019. The market risk positions that require capital charge are. 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. Where a bank under 200 basis points interest rate shock faces reduction in capital by 20% or more, such banks would be outliers. From a regulatory perspective, market risk stems from all the positions included in banks trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet. The new standards set out the committees expectations on the management of irrbb in terms of. Evolution of the capital accord basel i basel iii basel i minimum risk based capital, definition of capital mra market risk treatment in the trading book. Interest rate risk in the banking book irrbb bankinghub. Interest rate risk in the banking book aws felaban. Basel faces challenge on charge for interest rate risk in. Supervisors may implement additional tests and must publish.
Basel iii capital regulation has been implemented from april 1, 20 in india in phases and it will be fully implemented as on march 31, 2019. Ebagl201508 and in 2016 the basel committee on banking supervision bcbs. Capital requirements regulation european banking authority. Basel iv interest rate risk in the banking book regulatory horizon. The rest of the provisions of basel 2 standardized approach for credit risk, and basic indicator and standardized approaches for operational risk will be implemented by 2007.
Revised internal models approach for market risk 11 the history of the trading book regime 1996 basel i first methodology laid out by the bcbs to set out capital requirements for market risks. Capital adequacy framework basel ii riskweighted assets page 1 506 issued on. Due to the heterogeneous nature of this risk, it is captured in pillar 2. Regulation eu no 57520 of the european parliament and of the council of 26 june 20 on. This is known as interest rate risk in the banking book or irbb. The interest rate risk in the banking book can be measured and controlled at present value or periodically. Here the banks typically accept credit risk and interest rate risk. Interest rate risk in the banking book hong kong dollar. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. Banks rebuff basel interestrate plan as fed increase. Counterparty credit risk addon for repurchase transactions, securities or commodities lending or. As per basel iii capital regulations, the bank is required to maintain a minimum capital to risk weighted assets crar of 10. 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. The basel model captures interest rate risk in the trading book only, and it is a matter of national supervisory discretion as to whether interest rate risk is additionally monitored from a broader viewpoint, that is, with respect to the bank as a whole.
Interest rate risk in the banking book how to manage. But with the rules likely to arrive as rates start to be hiked, theres a lot riding on the project. Bcbs proposals for interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb is part of the basel capital. The basel committee on banking supervision has decided that the interest rate risk. The basel committee on banking supervision updated its 2004 interest rate risk. Frequently asked questions on market risk capital requirements 1 introduction in january 2016, the basel committee on banking supervision the committee published the standard minimum capital requirements for market risk. Basel iii capital regulations are being implemented in india with effect from april 1, 20. Capital adequacy framework basel ii riskweighted assets. Basel committee finalizes longawaited market risk framework.
The note also sets out a number of worked examples to illustrate the application of the. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. The final basel standards allow supervisors to impose capital charges under pillar 2 of the basel regime, providing the flexibility to impose charges where they. 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. The amendment to basel capital accord included standardised approach and internal models approach. Interest rate risk in the banking book irrbb definition. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a bank s capital and to its earnings, arising from the impact of adverse movements in interest rates on its banking book.
1559 1001 1175 1531 424 833 758 252 564 336 516 632 348 1007 969 664 43 1002 458 1216 439 1007 49 954 983 1437 1482 635 267 686 1544 567 57 993 1096 22 1098 433 413 1334 456 579