The Basel Committee on Banking Supervision has issued a consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book (IRRBB). This consultative document expands upon and is intended to ultimately replace the Basel Committee’s 2004 Principles for the management and supervision of interest rate risk.
The Committee’s review of the regulatory treatment of interest rate risk in the banking book is motivated by two objectives: First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. This is particularly important in the light of the current exceptionally low interest rate environment in many jurisdictions. Second, to limit capital arbitrage between the trading book and the banking book, as well as between banking book portfolios that are subject to different accounting treatments.
The proposal published presents two options for the capital treatment of interest rate risk in the banking book:
(i) a Pillar 1 (Minimum Capital Requirements) approach: the adoption of a uniformly applied Pillar 1 measure for calculating minimum capital requirements for this risk would have the benefit of promoting greater consistency, transparency and comparability, thereby promoting market confidence in banks’ capital adequacy and a level playing field internationally; alternatively,
(ii) an enhanced Pillar 2 approach: a Pillar 2 option, which includes quantitative disclosure of interest rate risk in the banking book based upon the proposed Pillar 1 approach, would better accommodate differing market conditions and risk management practices across jurisdictions.
The Committee is seeking comments on the proposed approaches, which share a number of common features. Comments are sought by 11 September 2015.
