Pdf interest rate risk management for commercial banks in kenya. Deregulation of interest rates has, however, exposed them to the adverse impacts of interest rate risk. Article interest rate risk in the banking book irrbb fis. As the reference rate changes over time, borrowers who pay floating interest rates will see their interest payments fluctuate depending on market conditions. Interest rate risk management for commercial ba nks in kenya. This study will also indicate any shortfall of bank in terms of interest rate risk management and offer suitable recommendations. As a result the interestrate risk management activities will be aligned with both the nature of the activities as well as with the capital structure of the company. Interest rate risk management at community banks community. Accepting this risk is a normal part of banking and can be an important source of pro. Changes in interest rate affect earnings, value of assets, liability, offbalance sheet items and cash flow. Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory. Management of interest rate risk in banks presenter. Risk management products and derivatives have grown ever more numerous and diverse since the late 1980s.
Nigeria for measuring, managing, monitoring and controlling interest. 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. Interest rate risk in the banking book irrbb bankinghub. Interest rate risk in banking book irrbb refers to the current or prospective risk. Mar 28, 2012 understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. Interest rate risk management everything you want to about irr. The standards revise the committees 2004 principles for the management and. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. 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. Differences between interest rate risk irr in the banking and. With the interest rate risk of the banking book, the basel committee on banking. Interest rate risk in the banking book irrbb is currently part of the basel capital frameworks. Suntrust s origination team will work closely with you to understand your risk management needs and assist in designing and executing a hedging strategy. The sensitivity depends on two things, the bonds time to maturity, and the coupon rate of the bond.
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. Interest rate risk in the banking book marcus evans. Interest rate risk is the exposure of a banks financial condition to adverse. Open library is an open, editable library catalog, building towards a web page for every book ever published. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. 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. If you sell the 3% bond before it matures, you will probably find that its price is higher than it was a year ago. Free banks and banking books download ebooks online. The new standards will apply from january 2018 onwards but some supervisors have already given a lot of attention to how irrbb is monitored and managed at many banks, given the current concerns about the lingering lowinterest rate environment. This book reveals how more than three dozen experts control and preserve the value of their own fixed income portfoliosfrom choosing the right.
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. Interest rate risk management print whether your interest rate risk profile is straightforward or complex, we can work with you to help design and implement an interest rate hedging strategy that you believe works best for your companys financial and risk management needs. Interest rate risk management suntrust corporate banking. Interest rate risk irr is defined as the change in a banks portfolio value due to interest rate fluctuations. Internal inspectionsaudits should, at a minimum, randomly test all aspects of interest rate risk management activities in order to. Interest rate risk management home federal housing. Interest rate risk management everything you want to. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. These actions serve to increase interest rate risk exposures and, thus, the need for more robust risk management programs. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices. This is known as interest rate risk in the banking book or irbb. This course note intends to introduce students to bank administration with emphasize on its risk management practices. 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 author explains the nature of interest rate risks in simple language, describing the methods typically used to measure them, with the added advantage of many worked examples.
Proper conduct of banking business directive 1 5 management of interest rate risk page 3333 chapter 1 general foreword 1. For irr management purposes, two broad categories of risk. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Interest rate risk market risk asset liability management balance sheet management banking book liquidity risk treasury risk booking line.
Impact of adverse movements in interest rates on organisations 4 4. These guidelines set out highlevel guidance, addressed to both credit institutions and investment firms, related to interest rate risk arising from nontrading activities irrbb. Interest rate risk lets say a treasury bond offers a 3% coupon rate, and a year later market interest rates fall to 2%. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018.
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. It is the potential loss from unexpected changes in interest rates, which can significantly affect a banks profitability and market value of equity. Interest rate futures, interest rate risk, risk management. Guidelines on the management of interest rate risk in the banking. The main objective of the survey was to gauge the readiness of firms to manage the new context of interest rates, and evolve their irrbb practice.
Free banks and banking books download ebooks online textbooks. In particular, it provides guidance to authorized institutions ais on effective systems for measuring, monitoring and controlling interest rate risk in the banking book. As a media partner of marcus evans, global banking and finance magazine is very excited to invite you to the forthcoming premier event 3rd edition managing interest rate risk in the banking book, taking place on the on the 27 th29 th of june in vienna, austria this conference will look at how banks can actively manage interest rate risk, improve frameworks, and advance behavioural models. Interest rate risk in the banking book irrbb definition. With the interest rate risk of the banking book, the basel committee on banking supervision bcbs 1 aims primarily to address the potential loss of economic value of institutions from a change in the interest rates called irr and credit spread risk csr in the banking book 2. Pdf interest rate risk management for commercial banks. Whitepaper interest rate risk in the banking book irrbb. Vighneswara swamy slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Management of interest rate risk in the banking book irrbb is starting to receive much more attention, after a long period in which other regulatory and risk management issues dominated the headlines. Video would be covering about regulatory of interest rate risk in banking books. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the. Guidelines on technical aspects of the management of interest. Fluctuations in interest rates affect earnings by altering interestsensitive income and expenses.
Interest rate risk in the banking book irrbb therefore reflects both the banks fundamental business model and its assetliabilitymanagement alm strategy. More importantly, the fact that credit spreads play an. 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. Methods to manage interest rate risks 5 appendix 1 terminology key terms which may be used 6 appendix 2 typical financial instruments and hedges 7. Whitepaper implementing interest rate risk in the banking. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking institutions. This article describes commonsense approaches that noncomplex insti. Interest rate risk in the banking book deloitte luxembourg fsi. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. The interest rate risk in the banking book can be measured and controlled at present value or periodically.
Even if managing interest rate risk is not part of your daytoday responsibilities, if you oversee and manage the process, you need a clear, definitive understanding of the issues so your bank can stay profitable. 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. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. The interest rate risk in banking book refers to the risk to a banks capital and. Interest rate risk is an integral part of banking business, and may even be a. Interest rate risk in the banking book and strategic planning areas of the bank should also communicate regularly to facilitate. T he management of interest rate risk should be one of the critical components of market risk management in banks. What is interest rate risk in the banking book irrbb. Interest rate risk in the banking book irrbb refers to the current or prospective. Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition. A more detailed description of irrbb and its management. 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.
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 banks. In other words, to establish an effective interestrate risk management policy for the company, you should identify and quantify the interestrate risk in a dynamic and correct way. The bond will still pay a 3% coupon rate, making it more valuable than new bonds paying just a 2% coupon rate. The guidelines also define the supervisory outlier test. 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. This book reveals how more than three dozen experts control and preserve the value of their own fixed income portfoliosfrom choosing the right risk management product to monitoring and evaluating the effectiveness of hedge management strategies. The guidance note sets out the hkmas supervisory approach to interest rate risk and the principles and sound practices relating to interest rate risk management. Interest rate risk management of commercial banks in. 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 new standards will apply from january 2018 onwards but some supervisors have already given a lot of attention to how irrbb is monitored and managed at many banks, given the current concerns about the lingering low interest rate environment. Due to the high relevance of the interest rate risk in the banking bookespecially in the context of a continued low interest rate phasethere are a number of regulatory requirements for the measurement and management of interest rate risks defined by international and national supervisory authorities.
This paper on the interest rate risk management of a bank will provide a detailed picture of risk management of bank because it is one of the concerned factors for every bank. This white paper focuses on understanding how current market conditions low interest. Interest rate risk for corporates zanders treasury. The new standards on irrbb will become effective by 1 january 2019. 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.
Investors need to know which ones will best serve their needs in todays dynamic bond market. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. 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. Rate risk in the banking book irrbb, as part of their internal capital. The paper sets out supervisory expectations regarding the measurement, management and governance arrangements of irrbb and its reflection in the icaap. Interest rate risk in the banking book irrbb masterclass. The purpose of this article is to provide an overview of the current banking landscape and to discuss key interest rate risk management activities and concepts for community banks. Interest rate risk in the banking book irrbb is part of the basel capital framework under pillar 2 and principles for the management and supervision of interest rate risk were set out in 2004 by the bcbs. Banks must have an adequate irrbb management framework, involving regular. Excessive levels of interest rate risks in the banking book can pose a significant threat to an institutions earnings and capital base. If you continue browsing the site, you agree to the use of cookies on this website. May 14, 2010 management of interest rate risk in banks presenter. Dec 03, 2010 open library is an open, editable library catalog, building towards a web page for every book ever published. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
We can assist in all areas of interest rate risk management, i. Recall that the interest rate risk on the banking book are within pillar 2 and as such they are not linked to banks capital requirements. Final report on guidelines on the management of interest rate risk arising from nontrading activities 4 measurement assumptions methods for measuring interest rate risk also covered in two annexes the governance of interest rate risk the identification, calculation and allocation of capital to interest rate risk. The management of interest rate risk should be one of the critical components of market risk management in banks. Interest rate changes also affect capital by changing the net. Interest rate risk management is critical to the overall profitability of your bank. Each institution should use them to ensure compliance with, and the integrity of, the interest rate risk policies and procedures. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Any changes in interest rates have an impact on the present value of future cash flows on the bank. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The regulatory restrictions in the past had greatly reduced many of the risks in the banking system. Interest rate risk in the banking book how to manage.