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
This chapter is concerned primarily with governance and oversight, and will focus on the role of the ALCO. While good governance is essential in the management of any risk, this is particularly true for IRRBB as it is a risk that – unlike, for example, market risk in the trading book – cannot be so readily delegated to a specialist unit since it stems from the activities of the whole bank, and the assumptions underpinning its management are the same assumptions that the bank employs in its day-to-day business activities. ALCO members therefore have responsibilities considerably beyond simply checking that the high-level risk numbers are within appetite: they need to understand and challenge the methodologies that are employed, particularly the assumptions upon which they are based.
The chapter will begin with a description of the type of information that an ALCO should receive, and discusses some of the difficulties its production often entails. It then proceeds to examine how a risk appetite should be set and how this can then be cascaded in the form of operational limits and other controls.
ALCOS AND ALCO REPORTING
All banks will have some form of senior executive