BCBS recalibration of shocks in the interest rate risk in the banking book standard

In July 2024, the Basel Committee on Banking Supervision (BCBS) finalised the targeted adjustments to its standard on interest rate risk in the banking book (IRRBB).

Executive Summary

The document, titled ‘Recalibration of Shocks in the Interest Rate Risk in the Banking Book Standard’, demonstrates the BCBS’s ongoing commitment to periodically update interest rate shocks. It is important to note that these changes are separate from the Committee’s ongoing work on IRRBB following the March 2023 banking turmoil – involved evaluating the regulatory and supervisory implications of the failures of Sillicon Valey Bank (SVB) and the rescue of Credit Suisse, which is considered the most significant system-wide banking stress since 2008.

The recent updates aim to better assess interest rate risk when rates are close to zero and the implementation date is January 2026.

Finalised changes

S/N

Area

Summary

1

Historical Data

The initial calibration method by the BCBS utilized data from 3 January 2000, to 31 December 2015. This timeframe has now been extended to December 2023 to account for recent interest rate changes. This will enhance the accuracy of the calculations.

2

Interest Rate Shock Parameters

The global shock factors have been replaced with local shock factors for each currency, based on local interest rate changes calculated over a rolling six-month period. This shift to  locally calculated shock factors for each currency places greater emphasis on the local economic parameters.

3

Percentile value for determing the Shock Factor

The percentile for considering changes in interest rates for shock calibration has been increased from the 99th to the 99.9th percentile to maintain sufficient conservatism.

4

Rounding of Interest Rate shocks

The rounding of interest rate shocks has been adjusted to a multiple of 25 basis points. According to the BCBS, this adjustment will minimize cliff effects and potential distortions across jurisdictions, aligning more closely with the incremental changes in central banks’ policy rates.

Implication for Banks

Banks should consider the potential implication for their activities well in advance of any formal adoption by the PRA. Some of which include:

  • Banks will likely face higher levels of interest rate risk across major currencies (GBP, EUR, USD, CNY & HKD), potentially affecting their capital requirements and earnings.
  • There will be a greater need for effective balance sheet management, advanced modeling capabilities, and proactive monitoring of Early Warning Indicators to avoid breaches in limits.

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