The New Basel Standards on IRRBB and Their Implications for ALM

Roberto Virreira Zijderveld

In this chapter we introduce the technical concepts and definitions applied by interest rate risk in the banking book (IRRBB) managers, describe the evolution of IRRBB regulation and regulatory thinking since the inception of this discipline and, finally, present the most recent regulatory framework set out by the Basel Committee on Banking Supervision (2016a) and some key considerations for its implementation in banking institutions.

First, we show how regulatory philosophies and techniques resulted in the current IRRBB practice and the Basel framework (Basel Committee on Banking Supervision 2016a). Then we show how and why IRRBB has progressively departed from market risk to form a new discipline primarily intended to address structural risk issues. Next we analyse the challenges, considerations and implications of implementing the 12 principles in the Basel framework. These principles are grouped according to their objectives and analysed in terms of different implementation alternatives and their effects on the organisation. Finally, we summarise the key implications of the Basel requirements and the emerging trends at the time of writing. We give some key concepts that are c

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