Interest Rate Risk in the Banking Book — A Review by Industry Leaders

On the 3rd of June 2016, Marcus Evans held a webinar entitled ‘Interest Rate Risk in the Banking Book’ in partnership with Oracle for their ‘Global Financial Market Webinars’ Portfolio. The webinar answers questions on the finalized IRRBB and how oracle can help banks manage their IRRBB (Interest Rate Risk in the Banking Book). In addition to this, there was an in-depth panel discussion and a Q&A.

With over 500 specialists from leading sectors in the finance industry registered, this webinar proved extremely popular and was acclaimed as informative and relevant.

The panellists included Moorad Choudhry, Founder of BTRM and former CEO of Habib Bank AG Zurich, Ziauddin Ishaq, Global Treasury Solutions Specialist at Oracle FS, Ali Salekfard, Head of ALM at Aldermore Bank and Paul Newson, former head of Non-Traded Market Risk Oversight at Lloyds Banking Group.

Ziauddin Ishaq started by speaking about the regulatory update — BCBS (Basel Committee on Banking Supervision) IRRBB. Ziauddin informs us of the modifications to the IRRBB in its finalized draft and the changes it will have on banking entities. He talks about how:

· The Pillar 1 approach advocated in previous consultative document has been dropped and replaced with an enhanced Pillar 2 principles based approach.

· Banks will need to broaden stress testing programmes, including six prescribed regulatory scenarios as well as incorporating/appreciating the negative interest rate scenarios.

· The lack of clear guidance provided by the committee with regards to CSRBB (Credit Spread Risk Banking Book).

· Modelling assumptions need to be scrutinized, validated and understood by senior management in addition to being subjected to a robust, fully audited model governance process.

· Disclosure requirement are of greater frequency, transparency and consistency to help aid comparability between peer groups.

· A supervisor may penalize an institution and even force standardization.

He went on to mention that the systems currently handling balance sheet management are ill-equipped to properly handle the modelling demand brought about by increased regulations and that their inflexibility cannot provide on demand regulatory responses. Some banks, realizing the enormity of the challenges have begun to put in processes and oracle infrastructures (OFSA) which provide the capabilities required to deliver a robust balance sheet management framework that would aid the institution during a future crisis.

Following this, the panel discussed:

· Given the industry resistance to the initial IRRBB CD September 2015, do you think banks are satisfied with the final standards?

· BCBS agrees that it is difficult for a Pillar 1 approach to address the complexity of developing a standardized measure for IRRBB, which his risk sensitive and accurate. Why is a Pillar 2 approach considered more appropriate?

· Failing the outlier/materiality test is a back-door for supervisors to push banks towards the standardized approach. Does the panel agree?

· What defines a good IRRBB management process? What should a bank do to ensure its Board does not get any nasty surprises?

· With greater emphasis on unearthing what drives consumer behaviour and the implication for IRRBB, what kind of modelling changes do you expect banks to undertake?

· Implications of simultaneously managing IRRBB and Liquidity Risk. What are the alignment challenges?

· What are the changes that are affecting non-trading portfolios in the context of CSRRB?

· In emerging markets, banks are unable to observe reliable market yield curves. In such instances how would a bank overcome these shortcomings, when trying to configure a set of interest rate scenarios? What are the consequences for reporting IRRBB and the ability to hedge the risks?

· Basis Risk, measurements of in the context of IRRBB and overall approach?

Negative Interest Rates

After the in-depth discussions, the panellists began a Q&A. The first question, “What is the best way or a best approach to incorporate/include the banks equity in its calculations?” was for Moorad Choudhry.

The second question, “Whether institutions should assign a capital to accommodate potential future earnings at risk which have been based off their stress testing programmes?” was for Paul Newson.

The next question, “How would the interest rates risk in the banking book impact the banks FTP practice and should the bank add on the impact of the changes on overall banks EVE into its new transactions for FTP?” was for Ali Salekfard, Moorad Choudhry also offered his opinion.

Following this, the panel was asked, “Does the panel think that the extensions of the interest rate risk scenarios (i.e. the six prescribed scenarios) has a much bigger impact than the lowering of the outlier limit to 15%?”.

Moorad Choudhry and Paul Newson answered the subsequent question, “The Pillar 1 approach has been in place in Australia for some time now, so why does the panel think it can work there but not elsewhere?”.

The penultimate question, “To what extent do you think smaller UK banks should attempt to comply with the BCBS standards prior to the further PRA guidance?” was answered by Ali Salekfard.

Moorad Choudhry answered the final question, “Principal six refers to the measurement systems integrity and accuracy of data, what is the panels opinion about the current situation of banks around this topic?” wrapping up the Q&A.

The webinar was a success, with key questions/topics discussed and debated upon, enlightening and informing the participants of the changes in the finalized IRRBB; the effects it will have and better practices banks can adopt with regards to IRRBB.

To watch this webinar and get access to the webinar slides, click here:

[embed]Interest Rate Risk in the Banking Book: What does the BCBS's revised standards mean for banks? We asked the industry leaders for their expertise on the revised standards to understand what this means for banks…events.marcusevans-events.com

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Harry Wilkinson, Intern

Marcus Evans 101 Finsbury Pavement, London, EC2A 1RS

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