Interest Rate Risk in the Banking Book

Monday, March 19th

09.00 - 09.15 Welcome

09.15 - 12.15

Introduction

  • Definition of IRRBB
  • Accounting and IRRBB
  • Changes in the Basel III Framework
  • Components of interest rates
    • Risk free rate, duration spread, liquidity spread, credit spreads, commercial margins
    • IRRBB and credit spread risk
  • Measurement of IRRBB
    • Earnings based measures - NII
    • Economic value based measures PV01, EV, EVE and EVaR
    • Interest rate scenarios
    • Options
    • Non maturing deposits behaviouralisation, core deposits

Refresher 1

  • Time value of money
  • Forward Rates
  • Compounding and day count conventions
    • Net Present Value of a future cash flow bond example
    • PV01, duration and convexity
  • Study Example

Draft Revised CRD and CRR

  • CRD - Articles 84, 98
  • CRR Articles 106, 448

12.15 - 13.15 Lunch

13.15 - 17.00

BCBS D368

  • IRRBB Scope and timelines
  • IRR Principles:
    • Comparison with current EBA requirements and bcbs 2004 (BCBS 108)
    • Discussion of Principles

Refresher 2

  • Constructing zero curves
  • Discount factors
  • Forward Curves
  • Interest Rate Swap Curves
  • Study Example

BCBS D368 - The standardised Framework

  • Overall structure
  • The components
  • Treatment of NMDs and capital
  • Behavioural options
  • Contractual options

Tuesday, March 20th

09.00 - 12.15

Calculation of the standardised EVE risk measure and NII

  • Case study using bank disclosures and based on D368 reporting requirements
    • Construct calculations and report using provided Spreadsheet
    • Discuss base assumptions and bank performance under the prescribed regulatory scenarios
    • Split into groups and consider revised submission
  • Role-play, face the regulator a Pillar 2 meeting

Managing Interest Rate Risk

  • Hedging duration risk
    • Bonds
    • Futures
    • Swaps
  • Hedging convexity risk
    • Options

12.15 - 13.15 Lunch

13.15 - 17.00

Comparison with revised market risk rules for the trading book (FRTB BCBS D352)

  • Introduction to FRTB
  • Trading book/banking book boundary definition under FRTB
  • Risk transfers from banking book to trading book
  • Standardised approach for interest rate risk under FRTB
  • Interest rate VaR (EVAR)
    • Expected Shortfall
    • Liquidity Horizons

Backtesting and model validation

Stress Testing

  • Supervisory scenarios
  • Bank scenarios

Related Topics

  • FTP/LTP

Evaluation and Termination of the Course

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