Interest rate risk in the banking book (IRRBB) is part of the Basel capital framework’s Pillar 2 (supervisory review process) and subject to the Basel Committee’s guidance set out in the 2004 Principles for the management and supervision of interest rate risk (the IRR Principles). The IRR Principles lay out the Basel Committee’s expectations for banks’ identification, measurement, monitoring and control of IRRBB as well as its supervision.

The Basel Committee has decided that the IRR Principles need to be updated to reflect changes in market and supervisory practices since they were first published. The Basel Committee has therefore published a document that contains an updated version that revises both the Principles and the methods expected to be used by banks for measuring, managing, monitoring and controlling such risks.

The key changes 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 banks are expected to implement the revised standards by 2018.

View Standards for interest rate risk in the banking book issued by the Basel Committee, 21 April 2016