Standards for interest rate risk in the banking book issued by the Basel Committee
The Basel Committee on Banking Supervision has today issued standards for Interest Rate Risk in the Banking Book (IRRBB). 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 key enhancements to the 2004 Principles include:
-
More extensive guidance on the expectations for a bank's IRRBB management process in areas such as the development of shock and stress scenarios as well as key behavioural and modelling assumptions to be considered by banks in their measurement of IRRBB;
-
Enhanced disclosure requirements to promote greater consistency, transparency and comparability in the measurement and management of IRRBB. This includes quantitative disclosure requirements based on common interest rate shock scenarios;
-
An updated standardised framework, which supervisors could mandate their banks to follow or banks could choose to adopt; and
-
A stricter threshold for identifying outlier banks that has been reduced from 20% of a bank's total capital to 15% of a bank's Tier 1 capital. In addition, interest rate risk exposure is measured by the maximum change in the economic value of equity under the prescribed interest rate shock scenarios.
The IRRBB standards reflect changes in market and supervisory practices since the Principles were first published in 2004, which is particularly pertinent in light of the current exceptionally low interest rates in many jurisdictions. The revised standards, which were published for consultation in June 2015, are expected to be implemented by 2018.