When interest rates change, the present value and timing of future cash flows also changes, which necessarily implies changes to the underlying value of a bank’s assets, liabilities and off-balance sheet items of credit institutions. Furthermore, it also affects bank’s earnings by altering interest rate-sensitive income and expenses, affecting its net interest income.
Therefore, the interest rate risk is inherent to the banking activity and its effective management impacts significantly to institutions’ profitability.
To date, the risk of interest rate to which the positions of the investment portfolio are subject was part of Pillar 2 of the Basel II framework.
This document prepared by the R&D area of Management Solutions analyses the requirements introduced by the updated Principles and the standardised method.
As a result of the approval of this new framework, institutions should be adapted to the updated Principles. The standardised method should only be implemented if it is required by the supervisor, although entities may adopt it on a voluntary basis.
Scope of application
Large internationally active banks on a consolidated basis. Nevertheless, supervisors have national discretion to apply the IRRBB framework to other institutions.
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