Irrbb consultative paper on interest rate risk in the. As per extant guidelines on management of interest rate risk in the banking book under pillar ii, banks where the economic value of the banking book declines by more than 20 % of the mve as a result of a standardised interest rate shock of 200 basis points are considered outlier from supervisory perspective. It was also recognized that the losses incurred in 2008 was the results of widening spreads due to credit downgrades, loss of liquidity and widening. The reserve bank of india on wednesday released norms for rupee interest rate derivatives in a view to consolidating, rationalising and simplifying all previous regulations issued for such contracts. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. One way to gauge the impact on earnings on account of holding assets and liabilities across different maturities or repricing dates is to look at. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb.
Whitepaper implementing interest rate risk in the banking. Irrbb overview interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Video would be covering about regulatory of interest rate risk in banking books. What is interest rate risk in the banking book irrbb. Managing interest rate risk duration gap analysis youtube. The difference between the trading and banking book blogger.
Irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in interest rates that affect the banks banking. Rbi issues draft guidelines on interest rate risk on. The basel committee on banking supervision released a consultation paper in june outlining two possible ways of determining capital charges for interest rate risk in the banking book irrbb. Rbi issues norms for interest rate derivatives, limits. Rbis external benchmark move could put pressure on banks. Since repo rate cuts signify reducing inflation, long term investors also face the reduction in fd rates but the effect is not as. In response to the new standards, the hkma published a consultation paper regarding the proposal to update the current spm module ir1 interest rate risk management and the return of mabs12 interest rate risk exposure in june 2017. Interest rate risk in the banking book irrbb irrbb overview interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. The first imposes a standardised capital requirement, while the second leaves the decision on. Viral v acharya, deputy governor, reserve bank of india rbi 15th january, 2018. Sources, effects and measurement of interest rate risk interest rate risk is the exposure of a bank s financial condition to adverse movements in interest rates. Rbi move credit negative for banks, says moodys the. Guidelines on the management of interest rate risk arising.
Risk in banking book irrbb refers to the current or prospective risk to. Janak raj on october 4, 2017 seeking feedback from general public and stakeholders by october 31, 2017. Managing interest rate risk duration gap analysis ronald moy. The webinar was attended by 285 industry professionals, and below. An ird is a financial derivative contract whose value is derived from one or more benchmark interest rates, price, interest rate instruments or interest rate indices. The reserve bank today released the draft guidelines on interest rate risk in banking book irrbb which stress on greater disclosures by lenders. Jun 26, 2019 an ird is a financial derivative contract whose value is derived from one or more benchmark interest rates, price, interest rate instruments or interest rate indices. Guidelines on the management of interest rate risk arising from nontrading book activities 2 abbreviations alco asset and liability management committee alm asset and liability management bcbs basel committee on banking supervision bsg banking stakeholder group cet1 common equity tier 1 csrbb credit spread risk from nontrading book activities crd capital. Rbi proposes a new set of risk measure norms for banks interest rate risk in banking book irrbb is a material source of risk to the banks in the long run, it is considered desirable to enhance the requirements applicable to irrbb, the central bank said. Rbi releases draft guidelines on interest rate risk in banking book. Draft guidelines governance, measurement and management of interest on rate risk in banking book.
Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect. He said the central bank had taken several measures to enable better management of interest rate risk by banks for instance, by allowing nonresidents to participate in the rupee interest rate swap market. So, basically, it manages liquidity risk, currency risk, interest rate risk and foreign currency risk. The interest rate risk in banking book refers to the risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Irrbb refers to the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect banking book positions. Excessive irrbb interest rate risk on banking book can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately, the rbi said. Liquidity risk and interest rate risk in the banking book irrbb and the. Please refer to the paragraph 5 of the statement on developmental and regulatory policies, by rbi, dated october 4, 2016. Understanding and managing interest rate risk at banks1 by. It was indicated therein that rbi would issue draft guidelines on interest rate risk in banking book irrbb.
Statement on developmental and regulatory policies, by rbi, dated october 4, 2016. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. Interest rate risk in the banking book means losses to earnings andor economic value of financial institutions as a result of change in interest rate which may arise from both on and offbalance sheet positions in the banking book. According to the report, indias gsibs are in the process of implementing the rules on interest rate risk in the banking book irrbb share via read full story.
Interest rate risk in the banking book irrbb definition. Irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect. Rbi issues draft guidelines on interest rate risk management. Details of types and interest rate risk impacts are in attachment 1. Commercial banking, origin and growth of banks, functions of commercial banks, role of commercial banks in economic development, reserve bank of india rbi, management, structure and functions of rbi, money market, constituents of money market, features of indian money market, capital. Handbook of banking information n s toor school of banking.
Banking guidelines on banks asset liability management. Draft guidelines on governance, measurement and management of interest rate risk in banking book. The impact of shocks were assessed by estimating income losses on the exposure gap of rate sensitive assets and liabilities, excluding afs and hft portfolios, for one year only for each time bucket separately. In this saving account, a customer can open his her account with zero balance.
Rbi proposes a new set of risk measure norms for banks the. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. Handbook of banking information in its 40th edition, is a book which covers all important aspects related to indian banking system. Rbi issues draft guidelines on interest rate risk on banking book.
Rbi requirements relating to risk management in banks. These guidelines on managing interest rate risk in the banking book are intended to provide guidance on designing the strategies and processes required for identifying, measuring, controlling and monitoring interest rate risks in the banking book. The interest rate risk in the banking book can be measured and controlled at present value or periodically. Under the new rules, moodys said banks will face interest rate risks, as while the floating rate loan book will get repriced, only the noncasa current account, savings account deposits will. Its impact on the economic value of the banks assets, liabilities and offbalance sheet positions. Bsbda stands for basic saving bank deposit account. Irrbb refers to the current or prospective risk to a banks capital and earnings, arising from adverse movements in. Quoting from rbi guidelines, interest rate risk is the risk where changes in market interest rates affect a banks financial position.
The standards revise the committees 2004 principles for the management and supervision of interest rate risk, which set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. As per extant guidelines on management of interest rate risk in the banking book under pillar ii, banks where the economic value of the banking book declines by more than 20% of the mve as a result of a standardised interest rate shock of 200 basis points are considered outlier from supervisory perspective. Organizational structure of banks, banking regulations, interest rate risk management in banks, credit risk management in banks, liquidity management in banks, operational risk management in banks, market risk management in. Rbi invites feedbackcomments on the draft guidelines. Understanding and managing interest rate risk at banks1. Rbi issues draft guidelines on interest rate risk management the draft guidelines suggest lenders to compute and disclose the changes in economic value of equity and net interest income.
Strategic balance sheet management by cfos interest rate. Guidelines on technical aspects of the management of interest. Interest rate risk in the banking book risk library. The reserve bank today released the draft guidelines on interest rate risk in banking book irrbb which stress on greater disclosures by. When interest rates change, the present value and timing of future cash flows change. The changes in interest rates impact a banks earnings i.
How does the rbi rate cut impact fd interest rates. Such unconventional monetary policy has an impact on interest rates, and therefore, requires a closer monitoring of the interest rate risk in the banking book irrbb. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. Reserve bank of india rbi, on thursday released draft guidelines on interest rate risk on banking book irrbb, seeking public comments on the same, by 3 march. Unofficial translation this translation is for the.
Alm, we are concerned with the banking book, and not so much with the trading book banking book market risks are interest rate risk in the banking book nii at risk or earnings at risk ear than var, due to changes in interest rates foreign exchange risk, equity prices risk and commodity prices risk in both banking and trading books. Interest rate risk arises when there is potential impact on the net interest margin by unexpected changes in the interest rates. Rbi introduced rupee interest rate derivatives in the otc market, viz. Quoting from rbi guidelines, interest rate risk is the risk where changes in market interest rates affect a bank s financial position. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. This course note intends to introduce students to bank administration with emphasize on its risk management practices. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect banking book positions. The feedbackcomments on the proposals contained in this document may be sent to the following address by march 3, 2017 electronic submission is encouraged. In terms of management of interest rate risk in the investment book, both are equally important. In this speech, however, data and charts pertain to only gsecs for simplicity. The chapters are 1 latest banking issues 2 credit operations of banks 3 priority sector lending in banks 4 banking law and practice covering various acts and customer related issues such as kyc, ombudsman etc.
Deepak mohanty rbi decided that banks should switch over to base rate system from july 1, 2010 for enhancing transparency in lending rates and enables better assessment of transmission of monetary policy. Interest rate risk in the banking book faq 7 whilst allowing firms to strike a compromise between net interest income sensitivity and economic value sensitivity that cannot be simultaneously cancelled out. Interest rate risk in banking book irrbb refers to the current or prospective risk to. All banks face interest rate risk irr and recent indications suggest it is increasing at least modestly. Banks have pointed out that they are currently not in a position to hedge interest rate risk given the absence of a developed interest rate swap irs market. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. Rbi proposes a new set of risk measure norms for banks. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
The changes in interest rates impact a bank s earnings i. Understanding and managing interest rate risk at banks. Jan 14, 2016 on june 8, 2015 the basel committee for banking supervision bcbs published the consultative paper 319 on interest rate risks in the banking book, which has been developed by the task force on interest rate risk in the banking book tfir over the last years. Accepting this risk is a normal part of banking and can be an important source of pro.
Number three was amended in 2009 by the basel committee when it was recognized that banks would incur a lower risk charge by holding assets in the trading book rather than in the banking book. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk4, which laid out the principles and the methods expected to be used by banks for measuring, managing, monitoring and. Whitepaper interest rate risk in the banking book irrbb. Similarly, when banks have excess funds, they voluntarily transfer it to rbi. The reserve bank of india has fallen short of meeting tougher requirements set by the basel iii norms, according to a report by the basel committee on bank supervision bcbs. On 2 february 2017, the rbi came up with draft guidelines focusing on the. Therefore, if interest rates on deposits remain sticky, banks cannot lend at rates linked to an external benchmark which may change every day, unless they manage this interest rate risk well. Interest rate risk in banking book irrbb is a material source of risk to the banks in the long run, it is considered desirable to enhance the. Interest rate risk arises when the net interest margin or the market value of equity mve of an institution is affected due to changes in the interest rates. Although irr sounds arcane for the layperson, the extra taxes paid after the savings and loan crisis of the 1980s suggests there is good reason to learn at least a little about irr. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Base rate and differential rate of interest bankexamstoday.
Standards on the interest risk in the banking book irrbb. Rbi struggling to improve rate transmission however, the central bank has also drawn up rules to prevent banks from gaming the system by tweaking risk premiums unless theres a material change in the status of the borrower. Rbi has received feedback from indian banks association iba. Evaluation of the impact of interest rate risk on the banking book was done through the income approach.
The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. Excessive irrbb can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately. In the present value perspective, the risk is quantified as an economic value change of the total banking book cash flow in case of changes in the yield curve. For example, if rates were to increase and a banks deposits repriced sooner than its loans, it could result in the bank paying out more interest on deposits than the interest it is receiving from loans. When reserve bank of india faces a financial crunch, they invite commercial banks and other financial institutions to deposit their excess funds into rbi treasury and offers them excellent interest rates. Let me at the outset wish all of you a happy and healthy new year. Risk management in indian banking sector and the role of rbi. Assuming there is space, there are upsides and downsides and based on that a considered call has to be taken, the rbi governor said.
Meeting the practical challenges moodys analytics and second, even if internal models were allowed in pillar 1, the constraints on their calibration would be too restrictive or lead to inconsistent results in scenarios involving shocked interest rates. Irr can be viewed in two ways its impact is on the earnings of the bank or its impact on the economic value of the banks assets, liabilities and offbalance sheet obs positions. Feb 02, 2017 rbi proposes a new set of risk measure norms for banks interest rate risk in banking book irrbb is a material source of risk to the banks in the long run, it is considered desirable to enhance the requirements applicable to irrbb, the central bank said. Jul 01, 2008 this would include, among others, the effectiveness of the banks risk management systems in identifying, assessing measuring, monitoring and managing various risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual risk. Implementing interest rate risk in the banking book irrbb. Issued in july 2004, this paper has the objective to support the pillar 2 approach to interest rate risk in the banking book within the basel ii capital framework. Banks reject nmd maturity limits in interest rate risk. Interest rate risk in the banking book irrbb bankinghub. Any changes in interest rates have an impact on the present value of future cash flows on the bank. The rbi directive was based on feedback received from the market participants to the draft guidelines that the central bank had released on april 3, 2019 for public comments.
Rbi issues norms for interest rate derivatives, limits retail. Understanding and managing interest rate risk at banks by. Cfa level i measurement of interest rate risk video lecture by mr. Rbi prescribed the minimum rate of interest on loans with effect from oct 1, 1960 on recommendations of working group chairman. Interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits.
This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability. The biggest impact of rbi rate cut is on short term fixed deposits. The interest rate under the external benchmark shall. Interest rate risk in the banking book, written by industry expert paul newson, provides a thorough guide to the new regulatory requirements surrounding irrbb and demonstrates the importance of good governance. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest. Implementing interest rate risk in the banking book irrbb polling results in march 2017, moodys analytics, together with asia risk and, held a webinar, interest rate risk in the banking book. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Express photo by nirmal harindran, file in a bid to tackle the impact of novel coronavirus on the indian economy, the reserve bank of india rbi cut its repo rate by 75 basis points bps to 4. The reserve bank of india has today placed on its website the draft guidelines on interest rate risk in banking book. Inclusion of sdls would not change the broad conclusions, and as they contribute to interest rate risk, would only strengthen them. The reserve bank of india of thursday released the draft guidelines on interest rate risk in banking book irrbb, which stress on greater disclosures by lenders. Interest rate futures irfs were first introduced in the indian markets in 2003 but only the current bond future contract, introduced in. Repo rate signifies the rate at which liquidity is injected into the banking system by rbi, whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks.
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