Interest Rate Risk in the Banking Book: A Best Practice Guide to Management and Hedging

Length: 256 pages
Edition: 1
Language: English
Publisher: Wiley
Publication Date: 2021-11-01
ISBN-10: 1119755018
ISBN-13: 9781119755012
Sales Rank: #2177597 (See Top 100 Books)

Introduces practical approaches for optimizing management and hedging of Interest Rate Risk in the Banking Book (IRRBB) driven by fast evolving regulatory landscape and market expectations.

Interest rate risk in the banking book (IRRBB) gained its importance through the regulatory requirements that have been growing and guiding the banking industry for the last couple of years. The importance of IRRBB is shifting for banks, away from ‘just’ a regulatory requirement to having an impact on the overall profitability of a financial institution. Interest Rate Risk in the Banking Book sheds light on the best practices for managing this importance risk category and provides detailed analysis of the hedging strategies, practical examples, and case studies based on the author’s experience. This handbook is rich in practical insights on methodological approach and contents of ALCO report, IRRBB policy, ICAAP, Risk Appetite Statement (RAS) and model documentation. It is intended for the Treasury, Risk and Finance department and is helpful in improving and optimizing their IRRBB framework and strategy. By the end of this IRRBB journey, the reader will be equipped with all the necessary tools to build a proactive and compliant framework within a financial institution.

Gain an updated understanding of the evolving regulatory landscape for IRRBB
Learn to apply maturity gap analysis, sensitivity analysis, and the hedging strategy in banking contexts • Understand how customer behavior impacts interest rate risk and how to manage the consequences
Examine case studies illustrating key IRRBB exposures and their implications

Written by London market risk expert Beata Lubinska, Interest Rate Risk in the Banking Book is the authoritative resource on this evolving topic.

Cover
Table of Contents
Titla Page
Copyright
Dedication
Preface
    About the Website
Introduction
Chapter 1: What is IRRBB and why is it important?
    SUBCATEGORIES OF INTEREST RATE RISK
    REGULATORY OVERVIEW FOR IRRBB – WHAT HAS CHANGED?
    ECB 2017 IRRBB STRESS TEST
    INTEREST RATE SHOCKS
Chapter 2: How to identify and measure Interest Rate Risk in the Banking Book
    IDENTIFICATION OF IRRBB – CASE STUDIES OF THE EXPOSURE TO IRRBB
    THE DUAL NATURE OF IRRBB
    EXPOSURE TO SHORT‐TERM INTEREST RATE RISK – MATURITY GAP ANALYSIS
    MATURITY GAP ANALYSIS FROM THE ECONOMIC VALUE PERSPECTIVE
    TIME BUCKET SENSITIVITY ANALYSIS – PV01
    DURATION GAP ANALYSIS
    IRRBB METRICS
    CREDIT SPREAD RISK IN THE BANKING BOOK (CSRBB)
    NOTES
Chapter 3: How to manage IRRBB
    HEDGING INSTRUMENTS FOR IRRBB
    WHY CONSIDER INTEREST RATE SWAPS?
    NATURAL HEDGING AND HEDGING THROUGH DERIVATIVES
    HEDGING STRATEGIES
    NOTES
Chapter 4: Behaviouralisation of items without deterministic maturity and their impact on IRRBB
    THE SIGNIFICANCE AND IMPACT OF BEHAVIOURAL ISSUES IN THE BANKING BOOK
    THE REASON FOR MODELLING CASA UNDER IRRBB
    THE IMPACT OF EARLY REDEMPTION OF FIXED RATE ASSETS ON IRRBB
    BASIC APPROACHES FOR THE MODELLING OF NMDs
    BASIC APPROACHES FOR THE MODELLING OF STATISTICAL PREPAYMENT ON THE ASSET SIDE
    MODEL RISK
Chapter 5: Interest rate risk and asset liability management
    MANAGEMENT OF IRRBB UNDER STRATEGIC ALM – PROACTIVE MANAGEMENT OF IRRBB
    SETTING UP THE TARGET PROFILE AND INTEGRATED MANAGEMENT OF LIQUIDITY AND INTEREST RATE RISK THROUGH THE APPLICATION OF NUMERICAL OPTIMISATION TECHNIQUE
    SETTING UP THE FUNDING STRATEGY FOR A BANK TAKING INTO CONSIDERATION THE HEDGING REQUIREMENTS
    IRRBB AND FUNDS TRANSFER PRICING
    COMPREHENSIVE AND FEASIBLE IRRBB STRATEGY
    MANAGEMENT OF THE INTRAGROUP INTEREST RATE RISK
Chapter 6: IRRBB stress test, reverse stress test and ICAAP
    IRRBB STRESS TESTING
    ICAAP – ASSESSMENT OF THE INTERNAL CAPITAL TO COVER IRRBB
Chapter 7: IRRBB governance and framework
    RISK APPETITE STATEMENT (RAS)
Appendix 1: Example of IRRBB policy aligned with the requirements of BCBS Standards
    IRRBB KEY METRICS AND MEASUREMENT PROCESSES
    IRRBB RISK APPETITE LIMITS
    IRRBB ESCALATION AND REPORTING PROCESS
Appendix 2: Example of IRRBB model manual
    A) THE PURPOSE OF THE MODEL
    B) COVERAGE
    C) SCOPE
    D) DESCRIPTION OF THE MEASUREMENT TECHNIQUES
    E) THE CALCULATION OF NET INTEREST INCOME SENSITIVITY (NIIS)
    F) THE CALCULATION OF THE ECONOMIC VALUE OF EQUITY VOLATILITY (∆EVE)
    G) TIME BUCKET SENSITIVITY ANALYSIS (PV01)
    H) TREATMENT OF THE AUTOMATIC OPTIONS
    I) CASH FLOW BUCKETING
    J) INTEREST RATE CURVE AND VALUATIONS
    K) ITEMS WITHOUT DETERMINISTIC MATURITY – CURRENT ACCOUNTS AND SAVINGS ACCOUNTS (CASA)
    INTEREST RATE SHOCKS
    INTEREST RATE SCENARIOS
    IRRBB MODEL COMPOSITION
References
Index
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