repricing risk: Governance, measurement and management of Interest Rate Risk in Banking Book

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Option risk – Risk arising from options in a bank’s assets, liabilities and/or off-balance sheet items where the bank or its customer can alter the level and timing of their cash flows. Option risk can be further characterized into automatic option risk and behavioural option risk. Gap risk– Risk arising from the term structure of instruments in banking book that arises from differences in the timing of their rate changes. The extent of gap risk depends on whether the changes to the term structure of interest rates occur consistently across the yield curve or differentially by period (non-parallel risk). Interest Rate Risk in Banking Book refers to the current or prospective risk to banks’ capital and earnings arising from adverse movements in interest rates that affect its banking book positions. Excessive IRRBB can pose a significant risk to banks’ current capital base and/or future earnings.

central banks

“As the domestic situation gradually stabilizes, the determination to resolve local debt risks and reduce overall leverage is being reflected in the prudent monetary policy” of China’s central bank, said Rollin Cai, fund manager at HSBC Jintrust Fund Management Co. Local fiscal revenue is likely to continue being squeezed by pandemic impacts, reducing how much provincial governments can support local SOEs, he said. Perform fast and highly granular analyses with an underlying high-performance analytics platform that provides rich data management, analytics and reporting capabilities. It also incorporates robust workflow functionality for orchestrating the entire process with full transparency and auditability. SAS acquires Kamakura Corporation, a leading provider of risk management software and data for the banking and insurance industries.

Effective duration is the percentage change in the price of the relevant instrument for a basis point change in yield. Effective oversight by a bank’s board of directors and senior management is critical to a sound interest rate risk management process. It is essential that these individuals are aware of their responsibilities with regard to interest rate risk management and that they adequately perform their roles in overseeing and managing interest rate risk. Banks must have adequate internal controls for their interest rate risk management process and should evaluate the adequacy and integrity of those controls periodically. Individuals responsible for evaluating control procedures must be independent of the function they are assigned to review.

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As such, it reflects the percentage change in the economic value of the instrument for a given percentage change in 1 + r. As with simple duration, it assumes a linear relationship between percentage changes in value and percentage changes in interest rates. The second form of duration relaxes this assumption, as well as the assumption that the timing of payments is fixed.

Banks transferred their risk from the banking e-book to buying and selling books as a result of VaR values are low. Rates have remained at low levels in 2010, with a reduction in lengthy-time period charges according to the slowdown in enterprise activity. And it does so whereas ensuring that exposure ranges match the chance profile outlined by the Group’s management our bodies and that a steadiness is maintained between anticipated earnings and the danger level borne. All this in addition to measurements of sensitivity to a regular deviation of one hundred foundation points for all the market yield curves. Chart 35 reveals the structural rate of interest profile of the primary entities of the BBVA Group, based on their sensitivities. If deposit charges enhance, the upper funding prices would probably cut back web yields on mounted-fee securities.

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SAS® Model Risk Management Significantly reduce your model risk, improve your decision making and financial performance, and meet regulatory demands with comprehensive model risk management. SAS® Asset and Liability Management Manage interest rate and funding liquidity risk with powerful, flexible capabilities for static and scenario-based dynamic balance sheet assumptions. Calculates risk sensitivity measures including durations and convexities for rate-sensitive instruments and Greeks for derivatives.

  • Conversely, a positive, or asset-sensitive, gap implies that the bank’s net interest income could decline as a result of a decrease in the level of interest rates.
  • “For bonds that were originally overvalued, we will now definitely require higher premiums and better protection,” said Yuanyuan Li, head of fixed income at HSBC Jintrust.
  • Compensation policies for these individuals should be adequate to attract and retain personnel qualified to assess the risk.
  • Procedures should be clearly laid out to approve major hedging or risk-taking initiatives prior to implementation.

The https://1investing.in/fall last quarter will be made up in the next two quarters, they say, thanks to product launches, on the one hand, and higher ad rates, on the other. 1 Although still technically a consultative paper subject to changes in the light of comments still to be received, this paper is included in the present volume because of the importance the Committee attaches to the sound management of interest rate risk. Depending on their overall approach, regulators may carry out this type of analysis either on a case-by-case basis or as part of a broader system designed to identify outliers with apparently excessive risk-taking. …greater inflation risk premium and more hawkish repricing of monetary tightening expectations. But it’s clear that the bloated state sector is in for some hard times, and investors need to be agile so they don’t get caught up in what could become a messy process. “For bonds that were originally overvalued, we will now definitely require higher premiums and better protection,” said Yuanyuan Li, head of fixed income at HSBC Jintrust.

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It should include clearly defined objectives, scenarios tailored to the bank’s businesses and risks, well documented assumptions and sound methodologies. This framework should be used to assess the potential impact of the scenarios on the bank’s financial condition, enable ongoing and effective review of stress tests and recommend actions based on the stress test results. Reviewing the results of a bank’s internal model can be highly informative, but can also be a difficult process because of the multitude of assumptions and modelling techniques that are important, but which need to be made transparent to supervisors.

These worries are being manifested in large FPI equity and bond outflows in March and April. US real rates is something we track and compare against Asia real rates as a gauge of relative policy stances. A notable development has been in 10Y US real yields which have risen significantly to -6bps, from around -80bps at end-February and -50bps at end-March.

This largely covers liquidity and refinancing risk apart from credit enhancement mechanisms . A. We are looking at the credit cards business where we are seeing very good growth momentum. Not because of any benefit from capital release, I think we can fund the capital requirements, but more in terms of what the strategic partner brings on the table or in terms of governance. 4 The discounting factors must be representative of a risk-free zero-coupon rate. An example of an acceptable yield curve is Zero Coupon Yield Curve published by the benchmark administrator. ∆NII should be computed assuming a constant balance sheet, where maturing or repricing cash flows are replaced by new cash flows with identical features as regards the amount, repricing period and spread components.


The ability of govt to absorb interest rates shocks will be much weaker and with similar or bigger mtm risk.. Much more stable growth inflation matrix over-all barring the pandemic year .. 6.6 Prior to receiving authorization for usage, the process for determining model inputs, assumptions, modelling methodologies and outputs should be reviewed and validated independently of the development of IRRBB models. The review and validation results and any recommendations on model usage should be presented to and approved by the Board or its Committee or ALCO. 6.1 Banks’ risk measurement system should be able to identify and quantify major sources of IRRBB exposure.

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The reason behind the same is the possibility of such lines not being made available by banks, in case of a steep deterioration in the credit quality of the issuer. Acuité places special emphasis on understanding the liquidity risk of the issuer, the long term resource mobilization ability and financial flexibility. CP as a short term unsecured instrument has to be essentially evaluated from the standpoint of the near term liquidity profile of the issuer. It has been observed that depending on the conditions in the money market, certain issuers may prefer to rollover/ refinance their CP Issue as a regular long-term practice, thereby warranting a medium term view along with the short term.

rate shock scenarios

The KRW front-end repricing risk segment is extremely steep and we see good potential for 1Y-5Y curve to flatten, especially if markets front-load pricing of BOK hikes and expect some accompanying negative impact on medium-term growth prospects. With our broad 2Q strategy in mind, we make several adjustments to our portfolio of Asia rates ideas. We exit open ideas involving receivers and curve-steepeners, namely long 30Y CGB, long 5Y IndoGB and receive 1Y1Y vs pay 5Y INR NDOIS ideas. Specifically on CNY rates, the prospects of rate cuts to 7D reverse repo or MLF appear to be waning and hence, room for CGB yields to fall is likely limited. If incremental support for the Chinese economy is provided via fiscal and credit easing, rather than monetary, long-duration CGB yields could face upward pressures. From a pricing perspective, while Asia rates have repriced higher, we think that current levels may not yet be factoring in a sufficient amount of inflation risk premium.

Aggregate interest rate risk limits clearly articulating the amount of interest rate risk acceptable to the bank should be approved by the board of directors and re-evaluated periodically. Such limits should be appropriate to the size, complexity and capital adequacy of the bank. Depending on the nature of a bank’s holdings and its general sophistication, limits can also be identified with individual business units, portfolios, instrument types or specific instruments. The level of detail of risk limits should reflect the characteristics of the bank’s holdings including the various sources of interest rate risk to which the bank is exposed.

Market Repricing Has Further Room to Run: Lynton-Brown – Bloomberg

Market Repricing Has Further Room to Run: Lynton-Brown.

Posted: Mon, 27 Feb 2023 15:05:32 GMT [source]

7.2 Banks should develop their own methodologies for capital allocation, based on their risk appetite. In determining the appropriate level of capital, banks should consider both the amount and the quality of capital needed. Less amenable to standardisation – Positions with optionality that makes the timing of notional repricing of cash flows uncertain by introducing a non-linearity, which suggests that delta-equivalent approximations are imprecise for large interest rate shock scenarios. The hole report will be unable to measure the whole impact of a change in interest rates inside a said time band.

The markets were, nevertheless, enthused by the strong double-digit profit growth, especially since growth was much lower at 9.5% and 3.8%, respectively, in the previous two quarters. Otherwise, there wasn’t much in the June quarter results to inspire confidence. Underlying volume growth was just 5.8%, and much of the 13.4% growth in domestic sales came from pricing improvement and a change in product mix. The soaps and detergents did better than analysts’ expectations, growing profit by 28.8% on the back of economies of scale and price increases. But that was offset by a negative surprise in the personal products business, which grew profit by just 9%. Of course, this is not the first time that spreads have gone up—they widened to even higher levels after last year’s stock market meltdown in May.

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