In a world of low interest rates, the thought of what could happen if there is a sudden interest rate shock is very much at the forefront of bankers’ minds. We are now seeing a divergence in monetary policies with the United States starting to raise interest rates; it might do so another three times this year. Meanwhile, other jurisdictions continue to maintain interest rates at historically low levels, or cut them even further. This divergence and recent market volatility are creating much uncertainty in terms of risk management. For many banks, tackling the interest rate issue and keeping their margins constant have become a top priority.
The new Basel Committee on Banking Supervision (BCBS) standards for IRRBB come into force January 1, 2018. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges.
The main practical challenges fall under three headings: Data gathering, modeling, and governance.
IRRBB presents an excellent opportunity to put in place a reporting framework that enables the sharing of reports between different teams in the bank. Top management must grasp this opportunity with both hands.