Treatment of interest rate risk in the banking book in Latin America

FSI Papers
September 2016

Interest rate risk in the banking book (IRRBB) is a bank's exposure to adverse movements in interest rates and the associated risk to its capital and earnings. Fluctuations in interest rates affect the time path and the present value of future cash flows. In response the economic value of a bank's assets and liabilities change. This risk is inherent to the banking business. However, high levels of exposure to IRRBB can pose a significant threat to a bank's viability. It is therefore important to establish sound supervisory assessments and, potentially, capital requirements for this type of risk.

The Basel Committee on Banking Supervision updated its 2004 interest rate risk principles1 in April 20162 following a consultation3 in 2015. The final standards continue to be captured in Pillar 2 by an "enhanced Pillar 2 approach", which includes elements of Pillar 3 and a strong presumption for capital consequences for banks with undue risk relative to capital or earnings, possibly under a supervisory mandated standardised approach based on the change in economic value of equity.

This paper provides a qualitative discussion of the current supervisory treatment of IRRBB in Latin America based on a survey among Association of Supervisors of Banks of the Americas (ASBA) member jurisdictions covering the main aspects of the new Basel capital framework: (i) IRRBB capital requirements; (ii) choices in assessing and measuring IRRBB; and (iii) reporting, disclosure and supervisory actions. The preliminary results of this survey was presented and discussed with representatives from ASBA jurisdictions at a FSI-ASBA Policy and Implementation Meeting in early 2016.

1 Basel Committee on Banking Supervision, Principles for the management and supervision of interest rate risk, July 2004.

2  Basel Committee on Banking Supervision, Interest rate risk in the banking book: standards, April 2016.

3 Basel Committee on Banking Supervision, Interest rate risk in the banking book: consultative document, June 2015.