Basel IV Interest Rate Risk in the Banking Book

The Basel Committee on Banking Supervision has decided that the interest rate risk principles and the methods used to measure, manage, monitor and control such risks need to be updated to reflect changes in market and supervisory practices. Also see the recently (23-11-2016) announced update on the CRR. The key updates are:

  • greater guidance on the expectations for a bank’s IRRBB management;
  • extended disclosure requirements to promote consistency, transparency and comparability in the measurement and management of IRRBB;
  • elaborated supervisory review process on the factors to consider when assessing the bank’s level and management of IRRBB exposures;
  • a stricter threshold for identifying outlier banks, from 20% of a bank's total capital to 15% of a bank's tier 1 capital.
Implementation / enforcement 10/2014 - 12/2016
Discussion / consultation 12/2016 - 12/2017
Implementation / enforcement 12/2017 - 01/2019
In effect 01/2019 -

Basel standards are subject to EU adaptation. Banks are expected to implement the standards in 2017

Despite earlier attempts, IRRBB has not yet been included as an element of Pillar 1 capital requirements, thereby remaining an element of Pillar 2. The revisions will stimulate to reflect IRRBB in Pillar 2 capital requirements and enhance supervisory focus on how banks manage IRRBB. Banks can continue with internal models, but can expect more exhaustive supervisory review. Further, banks may need to, on top of their own model, apply a standardised shock scenario and/or the standardised measurement framework. Inadequate management or excessive risk taking could result in supervisory and/or regulatory capital add ons. The risk appetite for IRRBB should be articulated in both economic value and earnings, and measurement thereof should be based on an appropriate range of scenarios.

Further information:
Basel standards on IRRBB
EU proposed adaptation (part of CRR2)

Steven Seijmonsbergen Director
Categories: Liquidity Capital and Risk