Interest Rate Risk in the Banking Book

Taking a closer look to the BCBS Standards

Banking alert | 17 May 2017

The Basel committee standards for IRRBB (Interest-Rate Risk in the Banking-Book) will apply from January 2018. IRRBB is a key focus of supervisors, and much attention is being given to how IRRBB is monitored and managed within banks, particularly given the current concerns about the lingering low-interest rate environment. In fact, Danièle Nouy, the head of the Single Supervisory Mechanism at the European Central Bank, told Handelsblatt in an exclusive interview that she is keeping a watchful eye on the impact that interest-rate increases could have on the balance sheets of EU banks. While higher interest rates would help improve their profits over the long term, there are concerns that it could increase financing costs in the shorter term.

In this context, Deloitte EMEA invited European and South African banks to participate in an online survey to assess their state of readiness concerning the new Basel standards, and to determine whether banks are moving towards enhanced governance frameworks, internal models and IT systems supporting the monitoring and management of IRRBB.

The key enhancements to the 2004 “Principles for the management and supervision of interest rate risk” include the following:

  • Enhanced disclosure requirements, including the impact of interest rate shocks on the change in economic value of equity (ΔEVE) and net interest income (ΔNII) based on prescribed scenarios, in order to promote greater consistency, transparency and comparability in the measurement and management of IRRBB;
  • More extensive guidance on expectations for a bank's IRRBB management framework such as: development of interest rate shock scenarios, consideration of behavioural and modelling assumptions, credit spread risk measurement, IRRBB Risk Appetite setting for both economic value and earnings, IRRBB inclusion in the ICAAP by taking account of changes in the economic value of equity and in net interest income;
  • Definition of a standardised framework to enhance risk capture and promote the use of common concepts: supervisors can require banks to implement the standardised approach as a fall-back (e.g. if they find that a bank does not adequately capture IRRBB). Alternatively, banks can adopt it voluntarily;
  • Updated supervisory process in terms of factors which supervisors should consider when assessing a bank’s level and management of IRRBB exposures; and
  • Stricter threshold for identifying outlier banks which has been reduced from 20% of a bank's total capital to 15% of a bank's Tier 1 capital. Supervisors may implement additional tests and must publish criteria for identifying outlier banks.

We are pleased to provide you with the highlights of Deloitte’s study on the Interest-Rate Risk in the Banking-Book. The survey is attached.

We hope that this pan-European survey of IRRBB management practices provides you with useful insights as you work to further enhance your organisation’s IRRBB programme.

Highlights of Deloitte’s study on the Interest Rate Risk in the Banking Book

Deloitte Italy event on IRRBB

Additionally, we would like to inform you of an event which is being organised by our Italian member firm in Milan on the 31 May. The event is free and is organised for all ALM practitioners, with the aim of providing an extensive view of main market and regulatory trends related to the management of Interest Rates. If you are interested in attending the event do not hesitate to get in touch.

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