Interest Rate Risk in the Banking Book

2 dny
Praha, hotel NH Prague

A comprehensive overview of the BCBS IRRBB standards, comparison with EBA standards and a refresher of the mathematical tools required

    How you will benefit:
  • An understanding of the revised standards
  • Gain theoretical and practical understanding of IRRBB methodology
  • Understand links between IRRBB and other regulatory initiatives such as FRTB and liquidity risk management.
  • Understand risk transfer, fund transfer pricing
  • Gain experience of facing regulatory challenge on proposed model.
Interest rate risk in the banking book (IRRBB) is part of the Basel capital framework under Pillar 2 and principles for the management and supervision of interest rate risk were set out in 2004 by the BCBS. Following consultation during 2015, BCBS published revised principles (D368) in April 2016, to reflect changes in market and supervisory practices.

This course provides a comprehensive overview of the current regulations in place including BCBS documents, supervisory statements, and legislative revisions primarily for Europe. These requirements will be compared with industry practice and also other regulatory initiatives, e.g. FRTB.

The course has three main objectives:
  • To provide a comprehensive overview of the new standards presented in BCBS papers, look at the implementation in Europe, particularly in connection with CRD, CRR and EBA guidelines and technical standards.
  • Refresh and develop quantitative techniques:
    • Cash flow discounting, zero curve construction, yield curve models
    • Computation of risk metrics, particularly: EVE, NII, LCR and NSFR.
    • A look at some modelling techniques: stochastic simulation, pricing options, modelling behavioural options, non performing loans, basis risk, credit spreads, capital and liquidity buffer calibration, stress testing.
    • Conditional probability theory in relation to stress scenarios
  • Review and discuss risk management techniques covering, for example, topics such as: hedging, funds transfer pricing, FRTB and interactions between the banking book and the trading book.

Since stress testing has become an important tool for risk management and a key part of the regulatory framework the course also spends time discussing the application of stress testing techniques. A particular area of focus will be on approaches to assigning probabilities to stress scenarios in order to deliver a coherent stress-testing framework.

Participants will engage in Spreadsheet-based exercises and also role-playing exercises where time constraints and class sizes permit. Role-playing exercises will be used to practice engagement with a regulator, defending assumptions and responding to likely regulatory challenge.

Those with less quantitative backgrounds should not be discouraged by the mathematical content. Spread sheet examples will be provided with all data and formulae that will allow all participants to engage in what-if scenarios to gain a feel for how different assumptions can affect the results in regulatory reports and the likely challenges. Participants will be invited to work in groups to prepare a report based on their own assumptions and a role-playing session will be used to give participants experience of a meeting with regulators to review their submissions.

09.15 - 12.15


  • Definition of IRRBB
  • Accounting and IRRBB
  • Changes in the Basel III Framework
  • Components of interest rates
    • Risk free rate, duration spread, liquidity spread, credit spreads, commercial margins
    • IRRBB and credit spread risk
  • Measurement of IRRBB
    • Earnings based measures - NII
    • Economic value based measures - PV01, EV, EVE and EVaR
    • Interest rate scenarios
    • Options
    • Non maturing deposits - behaviouralisation, core deposits

Refresher 1

  • Time value of money
  • Forward Rates
  • Compounding and day count conventions
    • Net Present Value of a future cash flow - bond example
    • PV01, duration and convexity
  • Study Example

Draft Revised CRD and CRR

  • CRD - Articles 84, 98
  • CRR - Articles 106, 448

12.15 - 13.15 Lunch

13.15 - 17.00


  • IRRBB - Scope and timelines
  • IRR Principles:
    • Comparison with current EBA requirements and bcbs 2004 (BCBS 108)
    • Discussion of Principles
  • US Implementation (optional)
  • Draft Revised CRD and CRR

Refresher 2

  • Constructing zero curves
  • Discount factors
  • Forward Curves
  • Interest Rate Swap Curves
  • Study Example

BCBS D368 - The standardised Framework

  • Overall structure
  • The components
  • Treatment of NMDs and capital
  • Behavioural options
  • Contractual options

Day Two

09.00 - 12.15

Calculation of the standardised EVE risk measure and NII

  • Case study using bank disclosures and based on D368 reporting requirements
    • Construct calculations and report using provided Spreadsheet
    • Discuss base assumptions and bank performance under the prescribed regulatory scenarios
    • Split into groups and consider revised submission
  • Role-play, face the regulator - a Pillar 2 meeting

Managing Interest Rate Risk

  • Hedging duration risk
    • Bonds
    • Futures
    • Swaps
  • Hedging convexity risk
    • Options
  • Simulation Models, Monte Carlo and option pricing
    • Behavioural Options

12.15 - 13.15 Lunch

13.15 - 17.00

Stress Testing

  • Regulatory requirements
  • A Monte Carlo Solution
  • Bayesian Solutions
    • Conditional probabilities of scenarios
    • Bayesian Networks

Related Topics

  • Risk Appetite Frameworks
  • Comparison with revised market risk rules for the trading book
    • Introduction to FRTB
    • Trading book/banking book boundary definition under FRTB
    • Risk transfers from banking book to trading book
    • Standardised approach for interest rate risk under FRTB
    • Liquidity Horizons

Evaluation and Termination of the Course

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