Interest rate risk in the banking book (IRRBB) is part of the Basel capital framework under SRP – the supervisory review process. This course provides a comprehensive overview of the BCBS framework and looks at implementation approaches primarily in Europe but also other jurisdictions. Discussion will be encouraged between participants on how IRRBB is implemented in their banks and issues they face. This will be facilitated by team spreadsheet-based exercises and also role-playing exercises where time constraints and class sizes permit. We will also explore the impact of other regulations on banking book management, for example FRTB and liquidity risk management.
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 risk aggregation. We will also explore scenario analysis techniques to consider CSRBB – credit spread risk in the banking book.
The course has four main objectives:
- To provide a comprehensive overview of the BCBS framework for IRRBB, look at the implementation in Europe, particularly in connection with CRD, CRR and EBA guidelines and technical standards with practical case studies.
- Review and discuss good risk management techniques, for example: hedging, management of yield curve risk, yield curve arbitrage, and good governance standards.
- Consider relevant topics (emphasis depending on audience demand) e.g. 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, CSRBB, stress testing.
- 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 and risk management 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