Interest rate risk in the banking book : a best practice guide to management and hedging / Beata Lubinska.

Includes bibliographical references and index.

Table of Contents
Preface vii

About the Website viii

Introduction 1

Chapter 1 What is IRRBB and why is it important? 6

Subcategories of interest rate risk 8

Regulatory overview for IRRBB – what has changed? 17

ECB 2017 IRRBB stress test 21

Interest rate shocks 24

Chapter 2 How to identify and measure Interest Rate Risk in the Banking Book 29

Identification of IRRBB – case studies of the exposure to IRRBB 29

The dual nature of IRRBB 44

Exposure to short-term

interest rate risk – maturity gap analysis 45

Maturity gap analysis from the economic value perspective 63

Time bucket sensitivity analysis – PV01 68

Duration gap analysis 69

IRRBB metrics 73

Credit Spread Risk in the Banking Book (CSRBB) 81

Chapter 3 How to manage IRRBB 84

Hedging instruments for IRRBB 84

Why consider interest rate swaps? 98

Natural hedging and hedging through derivatives 98

Hedging strategies 103

Chapter 4 Behaviouralisation of items without deterministic maturity and their impact on IRRBB 117

The significance and impact of behavioural issues in the banking book 117

The reason for modelling CASA under IRRBB 118

The impact of early redemption of fixed rate assets on IRRBB 121

Basic approaches for the modelling of NMDs 121

Basic approaches for the modelling of statistical prepayment on the asset side 130

Model risk 133

Chapter 5 Interest rate risk and asset liability management 136

Management of IRRBB under strategic ALM – proactive management of IRRBB 136

Setting up the target profile and integrated management of liquidityand interest rate risk through the application of numerical optimisation technique 143

Setting up the funding strategy for a bank taking into consideration the hedging requirements 149

IRRBB and funds transfer pricing 153

Comprehensive and feasible IRRBB strategy 171

Management of the intragroup interest rate risk 172

Chapter 6 IRRBB stress test, reverse stress test and ICAAP 175

IRRBB stress testing 175

ICAAP – assessment of the internal capital to cover IRRBB 185

Chapter 7 IRRBB governance and framework 190

Risk Appetite Statement (RAS) 190

Appendix 1: Example of IRRBB policy aligned with the requirements of BCBS Standards 197

Appendix 2: Example of IRRBB model manual 211

References 239

Index 241

"Asset Liability Management, the practice of matching the term structure and cash flows of an organization's asset and liability portfolios to maximize returns and minimize risk, is a key component of any financial institution's overall operating strategy. Due to a heavily regulated landscape and increasing competition for resources such as liquidity and capital, financial institutions -- especially banks -- are driven to constantly search for ways to run a more sophisticated ALM operation. As a result, the role of the ALM unit has to constantly evolve, extending beyond the risk management field. On top of the unit's traditional function of managing risk associated to the banking book, it now has to manage the regulatory capital of the bank and actively position the balance sheet to maximize profit. These contemporary challenges call for ALM optimization techniques, more particularly, ways to optimize the banking book using a quantifiable approach. The proposed book promotes active management of the banking book through optimization techniques presented in the book that effectively combine interest rate risk and liquidity risk management into one holistic approach"-- Provided by publisher.

About the Author
Beata Lubinska is Head of Market Risk at MeDirect Group in London, where her focus is on Interest Rate Risk in the Banking Book (IRRBB), Market Risk and Balance Sheet Management. She has over 15 years of experience in this space gained at GE Capital, Deloitte and Standard Chartered Bank both in Milan and London. Beata is also a faculty member at The Certificate of Bank Treasury Risk Management (BTRM) where she teaches optimization techniques in Asset Liability Management. She holds a PhD in Finance from Wroclaw University of Economics.