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Nematrian Reference Library

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Executive Summary (partial) "Interest rate risk in the banking book (IRRBB) is currently part of the Basel capital framework’s Pillar 2 (Supervisory Review Process). Most jurisdictions follow this approach, which is based on the Committee’s guidance set out in the 2004 Principles for the management and supervision of interest rate risk (henceforth the IRR Principles). The IRR Principles lay out the Committee’s expectations for banks’ identification, measurement, monitoring and control of IRRBB as well as its supervision. The Committee is proposing changes to the regulatory capital treatment and supervision of IRRBB for two reasons. 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 rates. Second, to limit incentives for capital arbitrage between the trading book and the banking book, as well as between banking book portfolios that are subject to different accounting treatments. This is particularly important given the enhancements to the capital treatment of positions in the trading book, including the Committee’s ongoing Fundamental Review of the Trading Book (FRTB). This consultative document presents two options for the regulatory treatments of IRRBB: a standardised Pillar 1 (Minimum Capital Requirements) approach and an enhanced Pillar 2 approach (which also includes elements of Pillar 3 – Market Discipline) …"

Additional Nematrian Commentary This consultation paper was followed by new standards which went down the Pillar 2 route, see here

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