Interest Rate Risk in the Banking Book: A Best Practice Guide to Management and Hedging

Cover
Title Page
Copyright Page
Contents
Preface
About the Website
Introduction
Chapter 1 What is IRRBB and why is it important?
	Subcategories of interest rate risk
		Repricing risk (gap risk)
		Yield risk
		Optionality risk
		Basis risk
	Regulatory overview for IRRBB – what has changed?
	ECB 2017 IRRBB stress test
	Interest rate shocks
		Oil Supply Crisis
		HY/LBO/Default Risk
		Inflation expectations
		Great Bond Massacre – 94
Chapter 2 How to identify and measure Interest Rate Risk in the Banking Book
	Identification of IRRBB – case studies of the exposure to IRRBB
	The dual nature of IRRBB
	Exposure to short-terminterest rate risk – maturity gap analysis
		Maturity gap analysis according to the advanced approach
		Brief comparison of two approaches: the basic maturity gap and the advanced repricing gap
		Two different ways of looking at the maturity gap
		Repricing gap analysis and refixing gap analysis
	Maturity gap analysis from the economic value perspective
	Time bucket sensitivity analysis – PV01
	Duration gap analysis
		Limits of duration gap analysis
	IRRBB metrics
		Earnings at Risk (EaR)
		Net Interest Income sensitivity – delta NII
		Present Value under + 1 bp parallel curve shift (PV01)
		Value at Risk (VaR)
	Credit Spread Risk in the Banking Book (CSRBB)
Chapter 3 How to manage IRRBB
	Hedging instruments for IRRBB
		Forward starting swaps
		Interest rate options – caps, floors and swaptions
	Why consider interest rate swaps?
	Natural hedging and hedging through derivatives
	Hedging strategies
		Blended rate strategy (also known as partial hedge)
		Interest rate cap and floor
		Forward rate lock
Chapter 4 Behaviouralisation of items without deterministic maturity and their impact on IRRBB
	The significance and impact of behavioural issues in the banking book
	The reason for modelling CASA under IRRBB
	The impact of early redemption of fixed rate assets on IRRBB
	Basic approaches for the modelling of NMDs
		Balance sensitivity modelling
	Basic approaches for the modelling of statistical prepayment on the asset side
		Statistical prepayments
		Financial prepayments
	Model risk
Chapter 5 Interest rate risk and asset liability management
	Management of IRRBB under strategic ALM – proactive management of IRRBB
		Introduction to integrated management of interest rate risk and liquidity risk
		Introduction to strategic FTP
	Setting up the target profile and integrated management of liquidity and interest rate risk through the application of numerical optimisation technique
		Introduction to the optimisation concept
	Setting up the funding strategy for a bank taking into consideration the hedging requirements
		Hedging and funding strategies under holistic view
	IRRBB and funds transfer pricing
		Pricing of different products on the banking book
		Behaviouralisation concept in FTP
	Comprehensive and feasible IRRBB strategy
	Management of the intragroup interest rate risk
Chapter 6 IRRBB stress test, reverse stress test and ICAAP
	IRRBB stress testing
		IRRBB stress testing methodology
		IRRBB stress test description
	ICAAP – assessment of the internal capital to cover IRRBB
Chapter 7 IRRBB governance and framework
	Risk Appetite Statement (RAS)
Appendix 1: Example of IRRBB policy aligned with the requirements of BCBS Standards
	IRRBB Key Metrics and Measurement Processes
	IRRBB Risk Appetite Limits
	IRRBB Escalation and Reporting Process
Appendix 2: Example of IRRBB model manual
	A) The Purpose of the Model
	B) Coverage
	C) Scope
	D) Description of the Measurement Techniques
	E) The Calculation of Net Interest Income Sensitivity (NIIS)
	F) The Calculation of the Economic Value of Equity Volatility (ΔEVE)
	G) Time Bucket Sensitivity Analysis (PV01)
	H) Treatment of the Automatic Options
	I) Cash Flow Bucketing
	J) Interest Rate Curve and Valuations
	K) Items Without Deterministic Maturity – Current Accounts and Savings Accounts (CASA)
	Interest Rate Shocks
	Interest Rate Scenarios
	Irrbb Model Composition
References
Index
EULA