This chapter contains a detailed description of interest rate risk in the banking book, its management techniques and the derivation of the standardised interest rate shocks.

Version effective as of 15 Dec 2019

First version in the format of the consolidated framework.

Definition of interest rate risk in the banking book

98.1 Interest rate risk in the banking book (IRRBB) refers to the current or prospective risk to a bank's capital and to its earnings, arising from the impact of adverse movements in interest rates on its banking book.

98.2 Excessive IRRBB can pose a significant threat to a bank's current capital base or future earnings if not managed appropriately. Changes in interest rates can affect the underlying economic value of the bank's assets, liabilities and off-balance sheet instruments, because the present value of future cash flows (and, in many cases, the amounts of cash flows themselves) change when interest rates change. Changes in interest rates also affect a bank's earnings by increasing or decreasing its net interest income (NII) and the level of other interest rate-sensitive income and operating expenses.

98.3 Fundamentally, there are two distinct methods for valuing banking book items, namely:

(1) "amortised" (or "historical") cost, where values are based on initial cost less accumulated depreciation, taking account of the expected life / maturity of the item; and