Interest Rate Risk in the Banking Book (2nd edition)
First published:
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IRRBB: Its links to the operating plan and stress testing
Foreword
Introduction to the First Edition
Introduction to the Second Edition
An overview of banking
Relevant accounting and financial concepts
Fundamentals of interest rate risk and the banking book
Standard metrics for the identification and assessment of IRRBB
Managing and hedging IRRBB
Interest rate basis risk and Libor transition
Behavioural assumptions in the management of IRRBB
Non-dated liabilities
Other types of market risk
Reporting and the management process
IRRBB: Its links to the operating plan and stress testing
Regulatory requirements
The chapter will then consider stress testing, which is becoming an increasingly used technique in respect of all risks but is particularly important in the case of IRRBB, as the impact of interest rate changes can only be assessed if consideration is also given to all the various assumption that the bank has to make about behaviour. The level of total potential loss inherently requires the consideration of a number of adverse scenarios to pinpoint vulnerabilities.
THE OPERATING PLAN
The operating plan constitutes an overall business projection of the bank’s likely profitability over the medium term. It is typically prepared on an annual basis, usually towards the end of each calendar year, and will comprise mainly a relatively detailed projection of the next year’s income and costs segmented by major business area, and accompanied by projected balance-sheet volumes and estimates of product mix. In addition, it will usually contain somewhat broader brush projections for later years, generally out to somewhere between three and five years.
Projected income will be broken down between NII and fees, and also between that stemming from new as opposed to existing business
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