The Basel Committee on Banking Supervision has launched a consultation on additional Pillar 2 guidance to strengthen banks’ management and supervisory oversight of interest rate risk in the banking book (IRRBB). The proposals address shortcomings identified particularly during elevated inflation, sharp interest rate increases and heightened market volatility. The consultation follows the Committee’s September agreement to seek improvements in implementation of its 2016 IRRBB framework.
For banks, the proposed guidance would strengthen model validation and ongoing performance monitoring, including testing assumptions about deposit behaviour, mortgage prepayments and deposit pricing. Models and vendor inputs should reflect each bank’s risk profile. Stress testing would cover multiple levels of interest rate shocks and sensitivity to key modelling assumptions. Banks with significant investment securities holdings would assess embedded gains and losses on securities held at amortised cost and report their impact on capital headroom to senior management and supervisors. Additional earnings indicators would complement economic value measures and the supervisory outlier test, which alone may obscure the effects of rate movements on earnings over shorter horizons.
A proposed “Supervisory Information” framework would support ongoing monitoring and examinations through information on modelling practices, hedging, earnings sensitivity and embedded losses. Senior management should receive and examine relevant information before it reaches supervisors. Supervisors would use peer comparisons and trend analysis to identify potentially excessive IRRBB exposures earlier and assess whether banks’ assumptions and controls reflect their business models and market conditions.