Interest rate risk in the banking book

Basel Committee on Banking Supervision Consultative Document Interest rate risk in the banking book Issued for comment by 11 September 2015 June 2015 A final version of this report was published in April 2016. http://www.bis.org/bcbs/publ/d368.htm This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-115-2 (print) ISBN 978-92-9197-114-5 (online) A final version of this report was published in April 2016. http://www.bis.org/bcbs/publ/d368.htm Contents Interest rate risk in the banking book ....................................................................................................................................... 1 Executive summary ........................................................................................................................................................................... 1 I. Introduction ................................................................................................................................................................................ 3 1. Lessons from the crisis and the Fundamental Review of the Trading Book ............................................ 3 2. Current treatment of interest rate risk in the banking book ......................................................................... 4 3. Banking and supervisory practices........................................................................................................................... 5 4. Key policy issues with respect to the measurement of IRRBB ...................................................................... 7 4.1. What types of interest rate risk should be captured by the IRRBB framework? .......................... 7 4.2. Economic value and earnings-based measures ........................................................................................ 8 4.3 How compatible should the IRRBB framework be with the standardised GIRR and CSR in the trading book framework? ........................................................................................................................... 8 4.4 Pillar 1 versus Pillar 2 approaches ................................................................................................................... 9 4.5. Is a standardised Pillar 1 methodology appropriate for all banking book positions? ............. 10 II. Minimum capital requirements for interest rate risk in the banking book (IRRBB) ..................................... 10 1. Criteria and overall structure of the Pillar 1 capital framework for IRRBB ............................................. 10 1.1. Criteria for developing an IRRBB standardised approach ................................................................... 10 1.2. Overview on the computation of minimum capital requirements for IRRBB .............................. 11 2. Components of an IRRBB standardised approach under Pillar 1 .............................................................. 13 2.1 Cash flow bucketing ........................................................................................................................................... 13 2.2. Interest rate shock scenario design .............................................................................................................. 14 2.3. Process for slotting and decomposing banking book instruments ................................................ 17 2.4 Treatment of positions amenable to standardisation ........................................................................... 19 2.5. Treatment of non-maturity deposits (NMDs) ........................................................................................... 19 2.6. Treatment of positions with behavioural options other than NMDs .............................................. 23 2.7. Automatic interest rate options ..................................................................................................................... 29 3. EVE measure ................................................................................................................................................................... 30 3.1. Calculation of the EVE measure ..................................................................................................................... 30 3.2. Additional EVE considerations ........................................................................................................................ 30 4. Earnings-based measures and basis risk ............................................................................................................. 31 4.1. Components of the regulatory earnings-based (NII) approach ....................................................... 31 4.2. General earnings-based (NII) measur