The Basel Committee on Banking Supervision (BCBS) has released a paper detailing the standards for interest rate risk in the banking book (IRRBB). This is part of the Basel capital framework Pillar 2 (the Supervisory Review Process).

In summary, the Basel Committee has decided that the IRR Principles need to be updated to reflect changes in supervisory and market practices that have occurred since the IRR Principles were first published. The proposed updates to the standards include the following:

  • Further guidance to be provided on the expectations for banks IRRBB management process, with particular regard to how banks respond to shock and stress scenarios. Additional guidance to be provided on modelling assumptions and the internal validation process that banks use for their internal measuring.
  • Further disclosure to be made by the banks, including the impact of interest rate shocks on their change in economic value in equity and net interest income, in order to secure greater transparency, consistency and comparability in the measurement and management of IRRBB.
  • Supervisors to consider the updated supervisory review process when assessing banks’ management and level IRRBB exposure. Supervisors have two options; they can either mandate their banks to follow the framework or banks can adopt the framework of their own volition.
  • Supervisors required to publish their criteria to identify outlier banks. The threshold for identifying an outlier bank has become more draconian as a result of it reducing from 20% of a bank’s total capital to 15% of a bank’s tier 1 capital. 

Banks are expected to implement the above IRRBB standards by 2018.