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IRRBB update

30 Jun 2015

The Basel Committee is keen that there is a consistent approach to the identification of IRRBB and the calculation of the capital that should be held against this risk, which arises from changes in interest rates and the shape of the yield curve which could adversely affect a bank’s net interest income.

At the beginning of June it published a consultation paper that proposed both a standardised Pillar 1 approach or alternatively, subject to agreement between the bank and its supervisor, a Pillar 2 approach, which banks had long been arguing for on the basis that there is no one size-fits-all approach. But the Pillar I approach, based on an economic value of equity methodology, would remain as the fall back position which has raised industry concerns about how risk sensitive the Pillar 2 approach would be in reality.

Banks contend that the pillar 1 approach would have significant impacts on both the range of products banks could offer to its customers and the price at which they would be delivered.

So it is good news that the task force is going to undertake a quantitative impact study (QIS) which banks very much support, although the timeline for completion, by end September, seems rather tight. It will be important that there is a transparent, flexible and interactive Frequently Asked Questions (FAQ) process whereby banks are able to engage with the task force almost on a real-time basis in order to overcome questions raised as they prepared to complete what appear to be quite complex templates.

It will also be important to engage with the industry as the task force analyses the results of the QIS.

IBFed is engaging actively with members in putting forward FAQs which we hope will improve the accuracy and relevance of the QIS and lead to proper evidence based rule making, which should be the objective of regulators and the industry alike.

 
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