Background:

Interest Rate Risk in the Banking Book (IRRBB) has emerged as a critical area of focus for financial institutions worldwide, especially in the wake of ongoing economic fluctuations and shifts in monetary policy. IRRBB covers the long-term exposures arising from the institution’s banking operations and it involves the risk of adverse changes in interest rates affecting the bank’s earnings and economic value. This risk is inherently linked to the bank’s core activities, and can significantly impact profitability and capital adequacy. Banks worldwide are now facing daily decisions of hedging their balance sheet mismatches while defending their
profitability and deposits market share in such a very competitive market.

From a technical standpoint, IRRBB requires robust measurement and management techniques to safeguard the institution’s financial health. Regulators are increasingly emphasizing the need for banks to develop
comprehensive frameworks to assess and manage IRRBB, particularly in light of evolving standards set forth by the Basel Committee on Banking Supervision which present significant challenges with respect to measurement, calculation and hedging of IRR, and this whole area is the subject of intense focus from the regulatory authorities, external auditors and rating agencies.

This course places a particular emphasis on the Internal Capital Adequacy Assessment Process (ICAAP), which serves as a crucial mechanism for banks to evaluate their capital needs relative to the risks they face. Effective ICAAP should not only comply with regulatory expectations but also reflect the institution’s internal risk appetite and strategic goals. Integrating IRRBB into the ICAAP framework is essential, as it allows banks to holistically assess their capital adequacy in the context of interest rate fluctuations and potential adverse scenarios.