Australian prudential regulation authority 3 prudential standard aps 117 capital adequacy. Interest rate risk in the banking book irrbb is the risk of loss in earnings or a fall in the value of banking book items as a consequence of movements in interest rates. 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. Video would be covering about regulatory of interest rate risk in banking books. Interest rate risk in the banking book advanced adis this prudential standard sets out the requirements that an authorised deposittaking institution with approval to use an internal model for interest rate risk in the banking book must meet for regulatory capital purposes, both at the time of initial implementation and on an ongoing basis. 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 crd capital. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. Deregulation of interest rates has, however, exposed them to the adverse impacts of interest rate risk. Consultations on revisions to the capital framework for. Interest rate risk in the banking book advanced adis aps 117. Box c interest rate risk in the australian financial. 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. Investors need to know which ones will best serve their needs in todays dynamic bond market. This context has led regulators to focus more closely on the interest rate risk in the banking book.
Rajesh kumar, in strategies of banks and other financial institutions, 2014. 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. 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. Interest rate risk in the banking book the course will be taught in a classroom based format with a variety of professionals from the industry including, the federal reserve bank, us. Apra has started a second consultation on the requirements of a draft prudential standard that aims to strengthen the framework for interest rate risk in the banking book irrbb. This book reveals how more than three dozen experts control and preserve the value of their own fixed income portfoliosfrom choosing the right risk management product to monitoring and evaluating the effectiveness of hedge management strategies. It presents information on the groups capital adequacy and risk weighted asset rwa calculations for credit risk including securitisation, market risk, interest rate risk in the banking book irrbb and operational risk. 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.
Interest rate risk management latest about banking. Interest rate risk in the banking book irrbb bankinghub. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. For the banking book, this is measured as the expected change in economic value from a 200 basis point increase in interest rates at all maturities. The risk arises primarily from loans, deposits, liquid assets and tradeable instruments used to hedge banking book exposures. Interest rate risk in the banking book irrbb definition.
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. Nov 07, 2019 interest rate risk exists in an interest bearing asset, such as a loan or a bond, due to the possibility of a change in the assets value resulting from the variability of interest rates. Interest rate risk in the banking book aps 117 sets out apras requirements of authorised deposittaking institutions adis in relation to the management and measurement of interest rate risk in the banking book irrbb and the holding of regulatory capital against this risk. 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. Apra interest rate risk in the banking book irrbb consultation. 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. 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. 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. An analysis of commercial bank exposure to interest rate risk david m. 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. Apra launches second consultation on irrbb framework in. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. 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.
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. The immediate impact of changes in interest rates is on the net. Prior to the floor being approved by apra, regulatory capital for market risk remained at zero as a result of the banking book embedded gain exceeding the sum of interest rate and optionality risk. This prudential practice guide aims to assist adis in complying with apra s requirements of adis to manage and measure interest rate risk in the banking book and, more generally, to outline prudent practices to manage and measure irrbb. In that way, it will support the modelled level of rwa. Differences between interest rate risk irr in the banking. Interest rate risk in the banking book how to manage. Interest rate risk management interest rate risk models risk measurement systems gap earnings economic valuation report simulation shortterm yes yes generally does not distinguish shortterm earnings accounting earnings from changes in exposure economic value. Adis are not required to hold capital against interest rate risk in the banking book.
The australian prudential regulation authority apra has remade the reporting standard ars 117. Apra launches second consultation on irrbb framework in australia. The regulatory restrictions in the past had greatly reduced many of the risks in the banking system. Interest rate risk exists in an interestbearing asset, such as a loan or a bond, due to the possibility of a change in the assets value resulting from the variability of interest rates. Interest rate risk in the banking book objective and key requirements of this prudential standard this prudential standard sets out the requirements that an authorised deposittaking institution must meet in relation to interest rate risk in the banking book. Interest rate risk in the banking book australian 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. This was driven by an apra requirement to include spread risk for debt securities held in the banking book and interest rate risk management activity. The australian prudential regulation authority apra requires banks to summarise and report on the extent of interest rate risk that they face. Interest rate risk update for banking kpmg australia. Houpt, of the boards division of banking supervision and regulation, prepared this article.
The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. It may also be used by the reserve bank of australia and the australian bureau of statistics. Prudential and reporting standards for authorised deposit. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. 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. Basel iii pillar 3 personal banking including accounts. Apra intends to publicly consult on revised irrbb disclosure requirements as part of the broader package of amendments to aps 330. This will prevent the modelled value of a banking book from declining under the weight of lending spread compression. Bcbs standard for interest rate risk in the banking book objectives, approaches and disclosure meeting on irrbb and the revised standardised approach for credit risk sao paulo, brazil 2728 april 2016 jeff miller fsi connect relationship manager financial stability institute. Interest rate risk in the australian financial system. 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 was driven by an apra requirement to include spread risk for debt securities held in the banking book and interest.
Interest rate risk in the banking book advanced adi, revised reporting requirements in ars 117. This prudential practice guide aims to assist adis in complying with apras requirements of adis to manage and measure interest rate risk in the banking book and, more generally, to outline prudent practices to manage and measure irrbb. 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. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn to capital arising from. Australias interest rate risk environment is set to change dramatically in the next two years. This consultation includes the draft prudential standard aps 117 and apra response to the submissions received in relation to the initial proposals on the revised irrbb requirements. An analysis of commercial bank exposure to interest rate risk.
Finalapg117november2007 prudential practice guide apg. Bcbs standard for interest rate risk in the banking book. Interest rate risk in the banking book irrbb legislation. This risk arises from mismatches in the repricing dates of an entitys banking book items. Guidelines on technical aspects of the management of. Interest rate risk is the risk to current or anticipated earnings or capital arising from movements in interest rates. Response paper on interest rate risk in the banking book requirements the september 2019 consultation includes apra s response to the submissions received in relation to its initial proposals on the revised interest rate risk in the banking book irrbb requirements, and commences a detailed consultation on other amendments to strengthen the irrbb prudential framework. Yield curve risk represents the risk of loss in earnings or economic value caused by a change in the relative levels of interest rates for different tenors that is, a change in the slope or shape of the yield curve. Interest rate risk an overview sciencedirect topics. Apra has commenced the second consultation on the framework for interest rate risk in the banking book irrbb for authorized deposittaking institutions in australia. Whitepaper implementing interest rate risk in the banking. Are banks ready for a return to a normal environment. 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.
Guidelines on the management of interest rate risk arising. May 14, 2010 interest rate risk management interest rate risk models risk measurement systems gap earnings economic valuation report simulation shortterm yes yes generally does not distinguish shortterm earnings accounting earnings from changes in exposure economic value. Apra updates reporting standard on interest rate risk in. Guidelines on technical aspects of the management of interest. The committees most recent release on this topic forms part of the proposed new basel capital accord. Leeto tlou and jonathan hacker provided assistance. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Capital adequacy and risks disclosures as at 30 september.
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. Interest rate risk has the potential to create adverse effects on the financial results and capital of the bank arising from positions in the banking book. The interest rate risk in the banking book can be measured and controlled at present value or periodically. This document also presents information on the group. What is interest rate risk in the banking book irrbb. For the banking book, this is measured as the expected change in economic value from a 200 basis point increase in interest rates at. Brochure report title goes here section title goes here. Box c interest rate risk in the australian financial system. This will change going forward, however, as the new accord provides apra and other national banking supervisors with the discretion to require capital to be held against interest rate risk in the banking book4. 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. Impact of standard interest rate shock on economic value of the banking book currency description for composites of immaterial currencies 200 basis point parallel increase excluding earnings offset 200 basis point parallel decrease excluding earnings offset.
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