Basel releases revised ‘Banking Book’

MANILA, Philippines - The Basel Committee on Banking Supervision has issued standards for Interest Rate Risk in the Banking Book (IRRBB).

The standards revised 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 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 behavioral and modeling 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 standardized 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 percent of a bank’s total capital to 15 percent 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. Implementation of the revised standards will be implemented by 2018.