Regulatory Requirements

Paul Newson

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