Interest rate risk in the banking book inhouse training. 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. Interest rate risk in the banking book inhouse training glc europe. Now in its fourth edition, this useful guide has been updated with the latest information on alm, basel 3, derivatives, liquidity analysis, market risk, structured products, credit risk, securitizations, and. Asset and liability management often abbreviated alm is the practice of managing financial.
Interest rate risk management strategies and irrbb risk training. To trace out the process and system of risk management. Examples of assetliability management investopedia. 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. When interest rates change, the present value and timing of future cash flows change. Irrbb consultative paper on interest rate risk in the. Risk reward provides expert trainers and training course materials to reputable training providers and directly to the regulators and the banking and financial services sector worldwide since 2002. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest rates that affect a banks banking book positions. Operate your banks irrbb process efficiently and effectively. Future regulatory directions with respect to interest rate risk in the banking book. Interest rate risk in the banking book irrbb june uk finance.
Sessions include the impact of low rates and negative rate challenges, how to manage deposit beta, and how to handle the effects of the ibor transition on. T he management of interest rate risk should be one of the critical components of market risk management in banks. Survey paper trends in banking book risk management 20152016 1 bankers now look not only to maximize profit, but also to avoid unexpected loss events and to minimize compliance costs. 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. Irrbb includes potentially adverse effects on earnings, capital, or both.
Risk management becomes one of the main functions of any banking. Interest rate risk in the banking book in 2015, two documents were published that will have a significant impact on the risk management framework of banking institutions. Whitepaper interest rate risk in the banking book irrbb. Irrbb partially captured via net interest income multiple. As it checks the creditworthiness of the industry, borrower etc. Sources of irrbb include interest rate gaps, basis risk, yield curve risk and option risk.
What is interest rate risk in the banking book irrbb. More importantly, the fact that credit spreads play an. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. Market risk is the risk of potential erosion of income or change in the value of assets and liabilities on and off balance sheet because of change in market conditions such as change in interest rates, exchange rates, value of bonds, yield curve, equity prices and commodity prices, etc. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Until basel ii reforms to banking supervision, operational risk was a residual category. It presents complex processes in a simplified way by providing reallife situations and examples. Risk management in banks introducing awesome theory. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. The traditional alm programs focus on interest rate risk and liquidity risk.
If a bank solely minimises its economic value risk by matching the repricing of its assets with liabilities beyond the short term, it could run the risk of earnings. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. This online training course provides a comprehensive coverage of risk management in banks, delivered by a finance expert and trainer. Banks must manage interest rate risk, which can lead to a mismatch of. The following diagrams are meant to illustrate the risk management process and the types of. Interest rate risk in the banking book hong kong dollar. Furthermore, the global crisis showed that risk cannot be contained within. All courses trading courses investing courses financial professional courses.
Risk management in bank operations includes risk identification, measurement and assessment, and its objective is to minimize negative effects risks can have on the financial result and capital of a bank. The management of interest rate risk is therefore critical to the stability of any banking corporation. Sensitivity analysis of irrbb stress test 2017 final. The banking book is a term for assets on a banks balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. Credit risk according to greuning and bratanovic 2009, credit risk refers to the situation whereby the issuer of the. Market risk training course risk management course iff.
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. A practical guide to the practices and procedures of effectively managing banking risks. Managing risks in commercial and retail banking wiley. Fundamentals of bank credit risk analysis created date. Of course, businesses in general, and other institutions such as the military. Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition. Operational risk is the risk of a change in value caused by the fact that actual losses, incurred. It is a form of risk management in which the investor seeks to mitigate or. Objectives the study the following are the objectives of the study. Interest rate risk is an integral part of banking business, and may even be a source of profit.
Interest rate risk management latest about banking. Risk management in banking is a comprehensive reference for the risk management industry, covering all aspects of the field. The first day will look at the complexity of irrbb including sessions focusing on irr metrics, risk appetite and designing scenarios and sensitivity analysis. 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. 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. However, from an earnings point of view, there cannot be an interest rate loss from investing equity in fixed rate assets in order to stabilize earning flows. Interest rate risk in the banking book irrbb masterclass.
Interest rate risk in the banking book alma asset and liability. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest rates that affect banking book positions. 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. Irrbb deals with the risks associated with a change in interest rates, and affecting a banks banking book, as opposed to its trading book. At worst, there could be an opportunity loss, but always. Following consultation during 2015, bcbs published revised principles d368 in april 2016, to reflect changes in market and supervisory practices. Funds transfer pricing, interest rate risk in the banking book, asset liability management and balance sheet management through ftp and optimization. This course note intends to introduce students to bank administration with emphasize on its risk management practices. How to address unorthodox monetary policies and negative interest rates. The basel committee issued revised standards for interest rate risk in the banking book in april 2016 and in 2018 they will expect organisations to be compliant. 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. Any changes in interest rates have an impact on the present value of future cash flows on the bank.
It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of. Risk management in banks banking online course apnacourse. 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. Endowments are longterm funds owned by nonprofit organizations e. Whitepaper implementing interest rate risk in the banking. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. The course covers the concepts of market risk, liquidity risk, credit risk, operational risk, basel regulations and more. Market risk, counterparty credit risk net interest income conduct risk and other operational risks noninterest income, expenses and capital amongst which. The seminal guide to risk management, streamlined and updated.
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. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. The banking book is a term for assets on a bank s balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. The standards, issued for the first time in more than a decade, introduced a strengthened pillar 2 approach and set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. This training course will have sessions from industry experts covering important topics post irrbb implementation. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. A detailed introduction to the measurement and management of liquidity risk a liquidity risk training course packed with practical case studies and computerbased exercises. Interest rate risk in the banking book irrbb is part of the basel capital framework under pillar 2 and principles for the management and. In april 2016, bcbs issued standards for interest rate risk in the banking book. 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.
Credit risk credit risks involve borrower risk, industry risk and portfolio risk. Managing risks in commercial and retail banking takes an indepth, logical look at dealing with all aspects of risk management within the banking sector. Interest rate risk in the banking book adeva partners. There are plenty of books on interest rate risk itself, but most tend to consider it from a trading or wholesale marketfacing perspective and, as a result, focus principally on the mathematics of quantifying risk, the likelihood of its occurrence and the features of the more complex financial instruments that exist in the wholesale market. Thousands of bankers, accountants, auditors and other financial specialists worldwide have attended courses with risk reward. This impacts the underlying value of the banks assets. The interest rate risk in banking book refers to the risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk. It is also known as default risk which checks the inability of an industry, counterparty or a customer who are unable to meet the commitments of making settlement of financial transactions.
In addition, beata is actively providing trainings for professionals from the banking industry in latvia, poland, uk and in the us. To identify the risks faced by the banking industry. Going beyond the basics of measurement and policy into real risk management. 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. Throughout the course we will use spreadsheet models based on the balance sheet of a typical universal bank to illustrate how the risk is modelled. Interest rate risk currency risk equity risk commodity risk. In may 2015, the european banking authority eba published an update to the guidelines for managing interest rate risk in the banking book irrbb. This course covers the main techniques used to measure interest rate risk in the banking book and how and why these differ from those used to measure similar.