Interest rate risk in banking book irrbb refers to the current or prospective risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Please refer to the paragraph 5 of the statement on developmental and regulatory policies, by rbi, dated october 4, 2016. Rbi asks banks not to charge usurious interest rate on loans. In this regard, the paper makes a number of recommendations regarding government policies and individual bank practices to manage interest rate risk. Houpt, of the boards division of banking supervision and regulation, prepared this article. Whitepaper interest rate risk in the banking book irrbb. The reserve bank of indias rbi move to cut the repo rate by 0. Indias real rates the interest rates that banks actually hand out loans at have remained above rbis own assessment range of 1. Rbi invites feedbackcomments on the draft guidelines. Interest rate risk in the banking book irrbb news and.
What is interest rate risk in the banking book irrbb. Four reasons why reserve bank of india may cut interest. Prudential guidelines on capital charge for market risks. Rbi issues draft guidelines on interest rate risk on banking book. Relates only to a bank that calculates the relationship between interest rate movements or shocks and noninterest income, bad debts and other relevant variables. Banks must disclose, among other requirements, the impact of interest rate shocks on. Sda for computing the capital requirement for market risk. Draft guidelines on governance, measurement and management of interest rate risk in banking book. 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. Repo rate is the rate at which banks borrow from the central bank was previously unchanged for three times in a row. 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. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Banking guidelines on banks asset liability management. No standard charge for banking books, but soupedup pillar 2.
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, 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. 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. In response to the new standards, the hkma published a consultation paper regarding the proposal to update the current spm module ir1 interest rate risk management and the return of mabs12 interest rate risk exposure in june 2017. The present rbi guidelines on irr require banks to carry out both the analyses. The feedbackcomments on the proposals contained in this document may be sent to the following address by march 3, 2017 electronic submission is encouraged. Implementing interest rate risk in the banking book irrbb. Banks offering higher interest rates on savings account comes with certain conditions.
Draft guidelines on governance, measurement, and management of interest rate risk in banking book statement on development and regulatory policies by rbi dated october 4, 2016 available from website. 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. Interest rate increase 35 interest rate decrease 36 1. Differences between interest rate risk irr in the banking and. 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. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous parallel shock scenarios. The webinar was attended by 285 industry professionals, and below. Banks are required to compute capital requirements for interest rate risk in trading. T he management of interest rate risk should be one of the critical components of market risk management in banks. Partial modified durations and pv01 are computed for the net interest rate positions in subportfolios representing different time bands of the banking book. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect. Basel abandons plans for pillar 1 rates risk charge. Changes in interest rate affect earnings, value of assets, liability, offbalance sheet items and cash flow.
May 12, 2020 sbis 1year fd is offering lower interest rate than some banks savings accounts 01 may, 2020, 04. Rbi issues draft guidelines on interest rate risk on. Rbi issued prudential guidelines on capital charge for. In april 2016, bcbs issued standards for interest rate risk in the banking book. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Reserve bank of india logo reserve bank of india database. The current market value will be determined as per extant rbi guidelines on valuation of investments. In accordance with the rbis requirement, the bank has.
Banks can take an interest rate position in the banking book, rather than the trading book, and would not be subject to a pillar 1 minimum capital requirements. The new standards will apply from january 2018 onwards but some supervisors have already given a lot of attention to how irrbb is monitored and managed at many banks, given the current concerns about the lingering low interest rate environment. Irrbb refers to the current or prospective risk to a banks capital and earnings. An analysis of commercial bank exposure to interest rate risk david m. Mar 28, 2012 interest rate risk in the banking book understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book event start date. The rate of interest on these rbi bonds has been fixed at 8%. The capital charge for interest rate related instruments and equities would apply to current market value of these items in bank s trading book. Interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. Interest rate risk management latest about banking. It is not proposed to issue any guidelines to the banks to offer loans to.
Implementing interest rate risk in the banking book irrbb polling results in march 2017, moodys analytics, together with asia risk and, held a webinar, interest rate risk in the banking book. Understanding and managing interest rate risk at banks by viral v. Interest rate risk in banking book irrbb refers to the current or. We all approach banks when we face a financial shortfall. Interest rate risk in the banking book irrbb is the risk of incurring an economic loss as a result of mismatches in.
Interest rate risk management at community banks community. These partial measures show the sensitivity of the market value of the banking book to a marginal parallel shift. Draft guidelines on interest rate risk in banking book. 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.
Viral v acharya, deputy governor, reserve bank of india rbi. Banks are required to compute capital requirements for interest rate. However, from an earnings point of view, there cannot be an interest rate loss from investing equity in fixed rate assets in order to stabilize earning flows. Interest rate risk in the banking book irrbb bankinghub. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk. With respect to interestrate risk management in the banking book, an alm consolidated risk report based on sensitivities and stress scenario results is provided. This impacts the underlying value of the banks assets. 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. Rbi issues draft guidelines on interest rate risk management. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. The management of interest rate risk is therefore critical to the stability of any banking corporation.
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. Interest rate risk in the banking book irrbb definition. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. The central govt has now decided to replace 8% bonds with 7. Annex draft guidelines on interest rate risk in banking book. An analysis of commercial bank exposure to interest rate risk. Apr 08, 2017 types of interest rates fixed by rbi repo rate. When interest rates change, the present value and timing of future cash flows change. The interest rate risk in the banking book can be measured and controlled at present value or periodically. Latest interest rate risk in the banking book irrbb articles on risk management, derivatives and complex finance. As per extant guidelines on management of interest rate risk in the banking book under pillar ii, banks where the economic value of the banking book declines by more than 20% of the mve as a result of a standardised interest rate shock of 200 basis points are considered outlier from supervisory perspective. Interest rate risk is an integral part of banking business, and may even be a source of profit. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of.
Managing the interest rate risk of indian banks government. Leeto tlou and jonathan hacker provided assistance. Jan 29, 2020 the rate of interest on these rbi bonds has been fixed at 8%. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. Likewise, banks approach the central bank, which is the reserve bank of india in our country if they face financial crisis. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks. Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition.
The new standards will apply from january 2018 onwards but some supervisors have already given a lot of attention to how irrbb is monitored and managed at many banks, given the current concerns about the lingering lowinterest rate environment. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. 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. Quoting from rbi guidelines, interest rate risk is the risk where changes in market interest rates affect a bank s financial position. 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. The reserve bank of india s rbi move to cut the repo rate by 0.
The rbi expects banks to have a clearly defined risk appetite statement. If passages have been quoted from the original, credits have been given. 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. It was indicated therein that rbi would issue draft guidelines on interest rate risk in banking book irrbb. The reserve bank of india, the central banking institution of india, controls the monetary policy of the indian currency.
The present rbi guidelines on irr require banks to carry out both the. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interestrate risk in the bankingbook. The reserve bank of india has today placed on its website the draft guidelines on interest rate risk in banking book. Reserve bank of india rbi, on thursday released draft guidelines on interest rate risk on banking book irrbb, seeking public comments on the same, by 3 march. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. Interest rate risk in the banking book irrbb is the risk of incurring an economic loss as a. Nov 11, 2016 irrbb interest rate risk in the banking book 1. The standards, issued for the first time in more than a decade, introduced a strengthened pillar 2 approach and set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. Relates only to a bank that calculates the relationship between interest rate movements or shocks and non interest income, bad debts and other relevant variables. Whitepaper implementing interest rate risk in the banking. Reserve bank of india weekly statistical supplement. Measurement of capital charge for interest rate risk in the trading book. At worst, there could be an opportunity loss, but always. Irrbb interest rate risk in the banking book a bearingpoint accelerator eba and the basel committee reacted to the current low interest environment with new or further detailed requirements for banks dealing with the risk arising from general banking business, known as interest rate risk in the banking book irrbb.
Sbis 1year fd is offering lower interest rate than some banks savings accounts 01 may, 2020, 04. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Rbi has advised boards of banks not to levy usurious interest rate including processing and other charges on loans. Interest rate risk in the banking book irrbb is part of the basel capital. Also, it reduced the cash reserve ratio maintained by the banks for the first time in over. Banks are required to compute capital requirements for interest rate risk in trading book. The risk that assets and liabilities reprice or mature at different times, causing margins between interest income and interest expense to narrow. The changes in interest rates impact a bank s earnings i. 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. As per the instruction received from rbi this will be a full consolidation. Scope and coverage of capital charge for market risks. Rbi releases draft guidelines on interest rate risk in banking book.
Feb 11, 2017 draft guidelines on governance, measurement, and management of interest rate risk in banking book statement on development and regulatory policies by rbi dated october 4, 2016 available from website. Rbi slashed the interest rate on credit card dues after i sent a petition to the honorable prime minister politics last year in may 2014, i had sent a letter about profiteering by indian banks to the prime ministers office, on the day when mr narendra modi took charge. Irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect. While interest rate risk can arise from various sources, four key types of interest rate risk are common to community bank balance sheets. Irr in the trading book is subject to pillar i and hence carries a capital charge, whereas interest rate risk in the banking book irrbb is.
1220 457 1516 669 186 1430 1230 269 1216 1173 1237 718 199 899 739 575 236 865 858 727 310 1027 1515 1251 921 1499 508 415 1008 881 39 294 1031 246 1465