Interest Rate Risk in the Banking Book (2nd edition)
First published:
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Regulatory requirements
Regulatory requirements
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
This chapter will describe the prudential regulatory regime for market risk in the banking book, with a particular focus on the regulatory requirements relating to IRRBB. The latter have been the subject of considerable debate since the mid-2010s stemming from regulatory concerns that the previous regime was inadequate.
The chapter will begin with a review of the regime as it existed before 2014 and will then proceed to examine in detail BCBS 368, which was published in April 2016 and constitutes the Basel Committee’s final standards on IRRBB.
The original intention was that these standards would be implemented by 2018. Implementation, however, has been extremely slow, but as of mid-2021 most national jurisdictions, with the notable exception of the US, have now set out their proposals for implementation. The chapter concludes with some general observations on two of these national implementations: those of the UK and the European Union.
BACKGROUND AND OVERVIEW OF REGULATORY OBJECTIVES
When considering the regulation of any banking activity, the principal focus is usually on the regulatory capital requirement, its computation method and how this might be optimised. It
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