Interest Rate Risk in the Banking Book (IRRBB)

Interest Rate Risk in the Banking Book (IRRBB)

The Basel Committee has issued revised standards for IRRBB, to be implemented by 2018.

Senior Advisor, EMA Regulatory Centre of Excellence

KPMG in the UK


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Basel Committee revised standards (PDF 690 KB) for IRRBB, to be implemented by 2018. 

The main “news” here relates to what the Basel Committee has not done – IRRBB has not been made a prescriptive element of Pillar 1 capital requirements, and therefore remains an element of the more judgemental and discretionary Pillar 2 capital requirements.

However, the revised and tougher standards – combined with the efforts of supervisors (in particular the European Central Bank) to apply Pillar 2 on a more consistent basis and the risks inherent in a low interest rate environment – will impart renewed impetus to reflecting IRRBB in Pillar 2 capital requirements and will generate a greater supervisory focus on how well banks manage (identify, measure, monitor and control) interest rate risk.

Key Enhancements

The key enhancements to the 2004 standards include:

  • A stricter threshold for identifying outlier banks, which has been reduced from 20% of a bank's total capital to 15% of a bank's Tier 1 capital;
  • More extensive guidance on how banks should manage interest rate risk, including the development of interest rate shock scenarios, the behavioural and modelling assumptions to be considered by banks in their measurement of IRRBB, and the internal validation process which banks should apply to their internal measurement systems and models;
  • A revised and more detailed standardised framework for IRRBB that banks may choose to follow, and to use within their Internal Capital Adequacy Assessment Process (ICAAP);
  • Enhanced Pillar 3 disclosure requirements to promote greater consistency, transparency and comparability in the measurement and management of IRRBB.  This includes quantitative disclosure requirements on the impact of a prescribed set of interest rate shock scenarios on economic value and net interest income.

There is a strong presumption for supervisory and/or regulatory capital consequences if the supervisory review a bank’s IRRBB exposure reveals inadequate management or excessive risk relative to a bank’s capital, earnings or general risk profile.


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