Guidelines on Managing Interest Rate Risk in the Banking Book

G u i d e l i n e s o n Managing Interest Rate Risk in the Banking Book These guidelines were prepared by the Oesterreichische Nationalbank (OeNB) in cooperation with the Financial Market Authority (FMA) Publisher and editor: Oesterreichische Nationalbank (OeNB) Otto-Wagner-Platz 3, 1090 Vienna,Austria Financial Market Authority (FMA) Praterstraße 23, 1020 Vienna,Austria Produced by: Oesterreichische Nationalbank Editors in chief: Günther Thonabauer, Communications Division (OeNB) Barbara Nösslinger, Executive Board Affairs and Public Relations (FMA) Coordinating editors: Gerhard Coosmann, Christian Doppler, Mario Plieschnig, Johannes Turner (all OeNB) Benedikt Hejda, Elisabeth Lehner, Elmar Mitterbuchner, Dagmar Urbanek, Ferdinand Wenzl (all FMA) Translation: OeNB Language Services Design: Peter Buchegger, Communications Division (OeNB) Typesetting, printing and production: OeNB Printing Office Otto-Wagner-Platz 3, 1090 Vienna, Austria Inquiries: Oesterreichische Nationalbank Communications Division Postal address: P.O. Box 61, 1011 Vienna,Austria Phone: (+43-1) 404 20-6666 Fax: (+43-1) 404 20-6698 E-Mail: oenb.info@oenb.at Financial Market Authority (FMA) Executive Board Affairs and Public Relations Praterstraße 23, 1090 Vienna,Austria Phone: (+43-1) 249 59-5100 Orders: Oesterreichische Nationalbank Documentation Management and Communications Services Postal address: P.O. Box 61, 1011 Vienna,Austria Phone: (+43-1) 404 20-2345 Fax: (+43-1) 404 20-2398 E-Mail: oenb.publikationen@oenb.at Internet: www.oenb.at www.fma.gv.at Paper: Salzer Demeter, 100% woodpulp paper, bleached without chlorine, acid-free without optical whiteners DVR 0031577 Preface The dynamic growth of financial markets and the increased use of complex products have been fundamentally changing the conditions under which credit institutions do business. To be able to cope with these challenges, credit insti-tutions need to implement sound risk control and management systems. As a significant source of earnings, banks’ interest rate business is at the same time one of their major factors of risk, and therefore needs to be assessed reli-ably. Under the new regulatory capital requirements of Basel II, interest rate risk in the trading book continues to carry a minimum capital charge (Pillar 1 of Basel II). What is new is that interest rate risk in the banking book needs to be assessed in the review of capital adequacy (Pillar 2 of Basel II). To this effect, banks need to implement sound processes and systems to ensure that they are adequately capitalized at all times in view of all material risks. In other words, banks must correctly map and evaluate any positions that are subject to interest rate risk within the framework of integrated (bank-wide) risk management. These “Guidelines on Managing Interest Rate Risk in the Banking Book” are intended to provide guidance on designing the strategies and processes required for identifying, measuring, controlling and monitoring interest rate risks in the banking book. The processes described in these guidelines are provided as examples and should solely be seen as such. After all, the selection and suit-ability of individual approaches depend to a large extent on the complexity of each bank’s business. In accordance with the principle of proportionality, these guidelines therefore focus on the nature, scale and complexity of banking activities rather than on bank size alone. The aim of these guidelines is to develop a mutual understanding between credit institutions and banking supervisors in respect of the management of interest rate risk in the banking book. In this context, the Oesterreichische Nationalbank (OeNB) and the Financial Market Authority (FMA) consider themselves as partners of Austria’s banks. We hope that these guidelines make for interesting and insightful reading. Vienna, spring 2008 Univ. Doz. Mag. Dr. Josef Christl Member of the Governing Board of the Oesterreichischen Nationalbank Dr. Kurt Pribil, Mag. Helmut Ettl Management Board of FMA 3 Table of Contents 1 Introduction 7 1.1 Motivation and Business Rationale 7 1.2 Definitions of Risk and Other Definitions 7 1.2.1 Definition of Interest Rate Risk 7 1.2.2 Earnings Perspective and Economic Value Perspective 8 1.2.3 Sources of Interest Rate Risk 8 1.2.4 Trading Book vs. Banking Book 9 2 International Regulations and Transposition into Austrian Legislation 11 2.1 Interest Rate Risks in the Banking Book from the Basel II Perspective 11 2.1.1 Pillar 2 – Inclusion of Interest Rate Risks 12 2.1.2 Pillar 3 – Disclosure Obligations Relating to Interest Rate Risk 12 2.1.3 Principles for Managing Interest Rate Risk – The Basel Paper on Interest Rate Risk 13 2.2 EU Statutory Requirements for Transposition into Austrian Legislation 17 2.2.1 Basel II Guidelines 17 2.2.2 Further Specifications by CEBS 18 2.3 Reporting Requirements for Interest Rate Statistics 19 2.3.1 Revised Reporting Regime 19 2.3.2 Statutory Reporting Requirements 19 2.3.3 Scope of Interest Rate Risk Reporting 20 2.3.4 Limitations of Interest Rate Risk Statistics and the Internal Model 20 2.4 Evaluation and Treatment of Interest Rate Statistics by Banking Supervisors 21 2.4.1 Reflections on Capital Adequacy 22 2.4.2 Standardized Interest Rate Shock 23 2.4.3 Definition and Treatment of Outlier Banks 23 3 Measuring and Managing Interest Rate Risk in the Banking Book 26 3.1 To Choose an Economic Value or an Earnings Perspective? 26 3.1.1 Managing Interest Rate Risk from an Earnings Perspective 27 3.1.2 Managing Interest Rate Risk from an Economic Value Perspective 27 3.1.3 “Optimal” Interest Rate Risk Management Strategies 28 3.2 Instruments for Quantifying Interest Rate Risks 31 3.2.1 Gap Analysis 32 3.2.2 Simulation Models 34 3.2.3 Elasticity Analysis 38 4 4 Integrated (Dual) Management of the Interest Rate Book 41 4.1 Definition of the Risk Strategy 46 4.1.1 Definition of Benchmarks 46 4.1.2 Definition of Interest Rate Management Philosophy 47 4.1.3 Interest Rate Risk Limits 48 4.1.4 Product Innovation Process 49 4.2 Cash Flow Modeling 51 4.2.1 Retail Transactions 52 4.2.2 Proprietary Trading Activities – Derivatives and Structured Products 71 4.2.3 Noninterest-Sensitive Positions with an Imputed Repricing Profile 77 4.3 Yield/Risk Analysis 78 4.3.1 Yield Analysis 78 4.3.2 Risk Analysis 79 4.3.3 Risk-Adjusted Performance Measures 83 4.4 Putting Interest Rate Risk Management into Action 84 4.4.1 Establishing the Need for Action 84 4.4.2 Rollover (Earnings Perspective) 86 4.4.3 Inclusion of Stress Tests 87 4.5 Ex Post Analysis 92 References 93 Abbreviation Key 95 ... - tailieumienphi.vn