The Reserve Bank of India (RBI) on 17 February issued final guidelines on Interest Rate Risk in Banking Book (IRRBB) which require banks to measure, monitor, and disclose their exposure to IRRBB that may impact the capital base and future of earnings of lenders.
Key points
- IRRBB 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.
- As per the guidelines, the Board of the banks has the responsibility for understanding the nature and the level of the bank’s IRRBB exposure.
- The Board should approve broad business strategies as well as overall policies with respect to IRRBB.
- The Board is responsible for ensuring that steps are taken by the bank to identify, measure, monitor and control IRRBB consistent with the approved strategies and policies.
- Interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits. For example, if rates were to increase and a bank’s deposits repriced sooner than its loans, it could result in the bank paying out more interest on deposits than the interest it is receiving from loans.
- The mismatch would subsequently bite into the bank’s net interest income, as well as affecting the economic value of its equity (EVE), which is derived by discounting future cash inflows and outflows.
- In April 2016, the Basel Committee on Banking Supervision finalised a new regulatory framework for IRRBB.
