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Interest Rate Risk in the Banking Book: 2017 Deloitte Survey

Taking a closer look at the BCBS Standards

In April 2016, the Basel Committee on Banking Supervision (BCBS) issued final Standards for IRRBB that replace the 2004 Principles for the Management and Supervision of Interest Rate Risk. The new Standards set out the Committee’s expectations on the management of Interest Rate Risk in the Banking Book (IRRBB) in terms of identification, measurement, monitoring, control and supervision. The updated IRRBB Principles also contain a proposed Standardised Framework which can be adopted by local regulators to measure the adequacy of capital to support IRRBB.

What our experts say

Following the publication in April 2016 of the new Standards on IRRBB, Deloitte invited European and South African banks to participate in an online survey to assess their current state of readiness against the new Basel Standards.

Thirty-seven banking groups, from ten different EMEA countries (including South Africa), responded to the survey. The survey was very timely as regulators around the world, including the South African Reserve Bank (SARB) and the European Central Bank (ECB), look to ensure that the requirements of the revised IRRBB Standards are implemented and embedded within banking groups within their jurisdiction during 2017 and going forward.

This white paper was written as a collaboration between IRRBB and ALM professionals from Deloitte member firms in Italy, South Africa, the United Kingdom, the Netherlands, France, Germany, Ireland, Switzerland, Austria, Spain, Portugal, Luxembourg and Malta, providing key insights on the themes identified from the responses to the survey.

In the white paper we highlight and discuss the expected implications of the new IRRBB standards on banks, across the following themes:

  • Models: framework of model risk management and typologies of behavioural models.
  • IRRBB Indicators: key measures and indicators (EVE, NII) and related approaches in terms of stress scenarios and dynamic analysis.
  • Limit Framework and Internal Capital: framework of operational limits on IRRBB and related approach for IRRBB internal capital quantification.
  • Governance: governance of IRRBB practices, key stakeholders (ALCO, Board) and related roles and responsibilities.
  • Reporting: internal reporting practices and new expected Pillar 3 disclosure requirements.
  • IRRBB systems and processes: main functionalities and expected evolution on IRRBB systems and processes.

 

How Deloitte can help:

  • IRRBB Identification, including assisting with defining banking book boundaries in accordance with the Final Basel Standards on IRRBB and on the Fundamental Review of the Trading Book (FRTB) and performing gap / benchmarking analyses of the bank’s current IRRBB framework vs. the requirements of the Standard.
  • IRRBB Measurement and Mitigation, including developing or validating IRRBB-standard compliant models such as EVE, NII, prepayment and non-maturity deposit models.
  • IRRBB Governance, including assistance with defining IRRBB strategy, designing IRRBB risk appetite frameworks and tolerance metrics, providing accounting assistance in relation to interest rate risk to address derivative accounting issues and compliance requirements, e.g. IFRS9 financial instruments, as well as developing IRRBB policies, processes and controls.
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