Why is Irrbb important?
If a bank solely minimises its economic value risk by matching the repricing of its assets with liabilities beyond the short term, it could run the risk of earnings volatility. Principle 1: IRRBB is an important risk for all banks that must be specifically identified, measured, monitored and controlled.
How is Irrbb measured?
Measurement of IRRBB should be based on outcomes of both economic value and earnings-based measures, arising from a wide and appropriate range of interest rate shock and stress scenarios. In measuring IRRBB, key behavioural and modelling assumptions should be fully understood, conceptually sound and documented.
What does Irrbb stand for?
This appendix gives you information on functionalities in ALM for Interest Rate Risk in the Banking Book (IRRBB ) regulation. IRRBB refers to the current or prospective risk to the bank’s capital and earnings a rising from adverse movements in interest rates that affect the bank’s banking book positions.
What are the three subtypes of internal rate risk in the banking book?
Three main sub-types of IRRBB are defined for the purposes of this chapter. All three sub-types of IRRBB potentially change the price/value or earnings/costs of interest rate-sensitive assets, liabilities and/or off-balance sheet items in a way, or at a time, that can adversely affect a bank’s financial condition.
Is Irrbb a market risk?
Interest rate risk in Banking Book (IRRBB) In case of the Banking Book, the main component of the market risk is interest rate risk.
How do you manage interest rate risk?
Interest rate risk can be reduced by holding bonds of different durations, and investors may also allay interest rate risk by hedging fixed-income investments with interest rate swaps, options, or other interest rate derivatives.
What is interest rate risk in Irrbb book?
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. When interest rates change, the present value and timing of future cash flows change.
What is FRTB regulation?
The Fundamental Review of the Trading Book (FRTB) is a comprehensive suite of capital rules developed by the Basel Committee on Banking Supervision (BCBS) as part of Basel III, intended to be applied to banks’ wholesale trading activities.
How do you mitigate interest rate risk?
What are the two components of interest rate risk?
Onlyprice and reinvestment risks are part of interest-rate risk.
What are hedging instruments?
A hedging instrument is any financial product that will enable traders to reduce or limit the risk in an underlying asset class, such as cash, shares, commodities, indices and forex.
Why is FRTB important?
It sets a higher bar for banks to use their own models for calculating capital; ensures banks are capturing tail risk events; and cements the boundary between trading and banking books. Banks can either use their own internal models or a standardised approach to calculate capital under FRTB.
What is the new regulatory framework for irrbb?
In April 2016, the Basel Committee on Banking Supervision finalised a new regulatory framework for IRRBB. Earlier drafts attempted to establish a standardised Pillar 1 capital charge for IRRBB but members were unable to agree on this.
What are the principles of irrbb management?
Principles 1 to 7 are of general application for the management of IRRBB, covering expectations for a bank’s IRRBB management process, in particular the need for effective IRRBB identification, measurement, monitoring and control activities.
Where can I find more detailed description of irrbb?
A more detailed description of IRRBB and its management techniques can be found in SRP98. Three main sub-types of IRRBB are defined for the purposes of this chapter.
Why is accurate and timely measurement of irrbb important?
Accurate and timely measurement of IRRBB is necessary for effective risk management and control. A bank’s risk measurement system should be able to identify and quantify the major sources of IRRBB exposure.