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 will describe the prudential regulatory regime for market risks in the banking book, with a particular focus on the regulatory requirements relating to IRRBB. The latter have been the subject of considerable debate in the period 2014–17, with regulators showing concern that the existing regime is inadequate and proposing a number of significant changes.
The chapter will begin with a review of the regime as it existed in 2014, and then proceed to examine the various suggestions for change and the banking industry’s response to these. While the BCBS issued its “final” standards on the subject in April 2016, there remains considerable uncertainty as to how in practice they will be implemented by national supervisors. It is thus a story that does not yet have an ending, so the chapter can only describe the proposals as they stand and consider their possible consequences.
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. Indeed, much of this chapter will be devoted to this aspect. However,