Basel Committee consults on interest rate risk in the banking book

The Basel Committee on Banking Supervision has recently 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 should be uploaded on to http://www.bis.org/bcbs/commentupload.htm by Friday 11 September 2015. All comments will be published on the website of the Bank for International Settlements unless a commenter explicitly requests confidential treatment.

Net Stable Funding Ratio disclosure requirements finalised by the Basel Committee

The Basel Committee on Banking Supervision has issued the final Net Stable Funding Ratio (“NSFR”) disclosure standards, following the publication of the NSFR standard in October 2014.

Similar to the LCR disclosure framework, this requirement will improve the transparency of regulatory funding requirements, reinforce the Principles for sound liquidity risk management and supervision, strengthen market discipline, and reduce uncertainty in the markets as the NSFR is implemented.

It is important that banks adopt a common public disclosure framework to help market participants consistently assess banks’ funding risk. To promote the consistency and usability of disclosures related to the NSFR, the Committee has agreed that internationally active banks in all Basel Committee member jurisdictions will be required to publish their NSFRs according to a common template.

In parallel with the implementation of the NSFR standard, supervisors will give effect to these disclosure requirements, and banks will be required to comply with them from the date of the first reporting period after 1 January 2018.