The BCBS issued revised standards for managing interest rate risk in the banking book (IRRBB). The standards enhance Pillar 2 requirements and set out 12 principles for banks to identify, measure, monitor, and control IRRBB. Banks must implement the standards by 2018 and provide new disclosures in their 2017 reports. Key updates include requiring disclosure and risk management of IRRBB based on earnings and economic value sensitivity, assessing credit spread risk, including IRRBB in stress testing, and strengthening internal validation of IRRBB models. The standards also set a limit on economic value sensitivity of 15% of Tier 1 capital and introduce a standardized IRRBB framework.

1. 1
BCBS revised standards for IRRBB – April 2016
The Basel Committee on Banking Supervision (BCBS) issued on April 21st its revised standards for Interest Rate
Risk in the Banking Book (IRRBB).
Following previous consultation on IRRBB conducted in 2015, BCBS decides to opt for an enhanced Pillar 2
approach and sets out 12 updated Principles laying out the Committee’s expectations for banks’ identification,
measurement, monitoring and control of IRRBB as well as its supervision.
Banks are expected to implement the standards by 2018 and provide the relevant disclosure in 2018, based
on information as of 31 December 2017.
Main key updates are as follows:
• IRRBB disclosure and risk-appetite will be based on both economic value (EVE) and earnings-based
(NII) sensitivity measures (see note 1 below)
o New reportings formats will support disclosure on quantitative and qualitative information,
including bank’s risk management objectives, bank’s policies concerning IRRBB, and details on
modelling assumptions
o Prescribed interest rate shock scenarios will capture parallel and non-parallel gap risks (see
note 1)
• Assessment and monitoring of Credit spread risk in the banking book (CSRBB) is required, however no
further guidance has been provided
• IRRBB will be included within a global stress testing framework, and as such:
o IRRBB stress testing will need to be covered in the Internal Capital Adequacy Assessment
Process (ICAAP)
o Internal interest rate shocks and stress scenarios will have to be undertaken, including the
impact of negative interest rates on bank’s balance sheet
o Qualitative and quantitative reverse stress testing will be required
• Bank’s IRRBB measurement systems and models will be subject to a strengthened internal validation
framework, including controls over data integrity, appropriate documentation, model monitoring,
benchmarking and backtesting of key internal parameters
• Supervisory limit on EVE sensitivity will be set at 15% of Tier 1 capital (vs. 20% before) –banks
breaching that threshold will be defined as ‘Outlier banks’ and will receive particular scrutiny from the
supervisor with probable expectation to undertake mitigative actions or to hold additional regulatory
capital
• A standardized framework for IRRBB modelling and standardized EVE calculation has been
introduced (see note 2 below) -supervisors can mandate a bank to follow this standardized framework
should a bank fail to capture IRRBB efficiently, or banks can choose to adopt it

2. 2
Note 1: Details on IRRBB reportings disclosure
• EVE sensitivity calculation will be based on a run-off balance sheet and an instantaneous shock (*)
• NII sensitivity calculation is defined as the change in projected NII over a forward-looking rolling 12-
month period compared with the bank’s own best estimate 12-month projections, using at least a
constant balance sheet assumption and an instantaneous shock
• 6 prescribed interest rate shock scenarios will capture parallel and non-parallel gap risks by currency:
o parallel shock up –EVE and NII
o parallel shock down –EVE and NII
o steepener shock (short rates down and long rates up) –EVE only
o flattener shock (short rates up and long rates down) –EVE only
o short rates shock up –EVE only
o short rates shock down –EVE only
(*) or based on the result of the standardized framework -if the bank has chosen to adopt it or has been
mandated by its supervisor to follow it
Note 2: Standardized framework main components
• Definitions and guidance for cash flows bucketing and slotting
• Modelling constraints on non-maturity deposits (such as caps on % of core deposits and caps on
average maturity of core deposits per category), on conditional prepayment rate (CPR) and CPR under
shock scenarios, and on other positions with behavioural options or interest rate options
• Calculation guidance of a standardized EVE measure