September 21 - 22, 2020

Interest Rate Risk in the Banking Book

Agenda Program Online Video
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Prague, NH Hotel Prague
Both in-class and online training available
Price for online training
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How you will benefit:

An understanding of the revised standards
Gain theoretical and practical understanding of IRRBB methodology
Understand links between IRRBB and other regulatory initiatives such as FRTB and liquidity risk management.
Understand risk transfer, fund transfer pricing
Gain experience of facing regulatory challenge on proposed model.
Interest rate risk in the banking book (IRRBB) is part of the Basel capital framework under Pillar 2 and principles for the management and supervision of interest rate risk were set out in 2004 by the BCBS. Following consultation during 2015, BCBS published revised principles (D368) in April 2016, to reflect changes in market and supervisory practices.

This course provides a comprehensive overview of the current regulations in place including BCBS documents, supervisory statements, and legislative revisions primarily for Europe. These requirements will be compared with industry practice and also other regulatory initiatives, e.g. FRTB.

Since stress testing has become an important tool for risk management and a key part of the regulatory framework the course also spends time discussing the application of stress testing techniques. A particular area of focus will be on approaches to assigning probabilities to stress scenarios in order to deliver a coherent stress-testing framework.

Participants will engage in Spreadsheet-based exercises and also role-playing exercises where time constraints and class sizes permit. Role-playing exercises will be used to practice engagement with a regulator, defending assumptions and responding to likely regulatory challenge.

The course has three main objectives:
  • To provide a comprehensive overview of the new standards presented in BCBS papers, look at the implementation in Europe, particularly in connection with CRD, CRR and EBA guidelines and technical standards.
  • Refresh and develop quantitative techniques:
    • Cash flow discounting, zero curve construction, yield curve models
    • Computation of risk metrics, particularly: EVE, NII.
    • A look at some modelling techniques: stochastic simulation, pricing options, modelling behavioural options, non performing loans, basis risk, credit spreads, capital and liquidity buffer calibration, stress testing.
    • Assigning probabilities to stress scenarios in order to compute an economic capital number
  • Review and discuss risk management techniques and regulatory initiatives, for example: hedging, funds transfer pricing, risk free interest rate benchmarks (replacements for the IBORs), Liquidity Risk Management, FRTB and interactions between the banking book and the trading book.

Those with less quantitative backgrounds should not be discouraged by the mathematical content. Spread sheet examples will be provided with all data and formulae that will allow all participants to engage in 'what-if' scenarios to gain a feel for how different assumptions can affect the results in regulatory reports and the likely challenges. Participants will be invited to work in groups to prepare a report based on their own assumptions and a role-playing session will be used to give participants experience of a meeting with regulators to review their submissions.
Participants are encouraged to bring their own notebook with MS Excel to maximize the interaction, practical examples and benefit from the seminar.

Program of the seminar: Interest Rate Risk in the Banking Book

09.00 - 09.15 Welcome

09.15 - 12.15


  • 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


  • IRRBB - Scope and timelines
  • IRR Principles:
    • Comparison with current EBA requirements and bcbs 2004 (BCBS 108)
    • Discussion of Principles
  • US Implementation (optional)
  • Draft Revised CRD and CRR

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

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

Modelling Interest Rates

  • Simulation Models, Monte Carlo and option pricing
    • Behavioural Options - deposit withdrawal, prepayment risk, wrong way risk, default risk
  • Sensitivity of NMD rates to changes in market rates - passthrough rates - a bank policy decision
  • The econometric relationship between NMD rates, loan portfolio rates and market rates

12.15 - 13.15 Lunch

13.15 - 17.00 Funds Transfer Pricing

Risk Free Reference Rates Benchmarks

  • RFRs and the IBORS
  • Term Structure of RFRs
  • Issuance activity

Stress Testing

  • Regulatory requirements
  • A Monte Carlo Solution
  • Bayesian Solutions
    • Bayesian Networks - deriving an economic capital number from scenarios
    • Optimisation methods
    • Conditional probabilities of scenarios

Related Topics

  • Risk Appetite Frameworks
  • Introduction to FRTB
    • Trading book/banking book boundary definition under FRTB
    • Risk transfers from banking book to trading book
    • Liquidity Horizons

Evaluation and Termination of the Course

Online Seminars
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