An Overview of Banking
Relevant Accounting and Financial Concepts
Fundamentals of Interest Rate Risk and the Banking Book
Standard Metrics for Identification and Assessment of IRRBB
Managing and Hedging IRRBB
Interest Rate Basis Risk
Behavioural Assumptions in the Management of IRRBB
Other Types of Market Risk
Reporting and the Management Process
IRRBB: Its Links to the Operating Plan and Stress Testing
Previous chapters have alluded to the fact that for many banking book products, particularly those of a retail nature, there is often no single re-pricing date or external reference rate to which both the bank and the customer are contractually bound. Consequently, to manage IRRBB, assumptions have to be made as to when and by how much each product is likely to re-price in response to a move in the general level of interest rates.
This chapter will review the major categories of asset and liabilities found on a typical bank balance sheet, and highlight for each the principal areas where assumptions have to be made and the issues – both practical and theoretical – that can arise. Current accounts, permanently insensitive savings balances and equity are, however, covered separately in Chapter 8 as their management and hedging give rise to slightly different issues.
Understanding of behavioural assumptions is vital to the management of IRRBB, and is what distinguishes it from the management of interest rate risk in a wholesale or trading environment where, although the products may be much more complicated, their re-pricing date is usually totally