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Article 4: Interest Rate Risk Measurement and Use of Models

C 165/2019 STA
  1. 1.A Bank must have an interest rate risk measurement systems that assesses the effects of rate changes on both earnings and economic value. These systems must provide meaningful measures of a Bank’s current levels of interest rate risk exposure and must be capable of identifying any excessive exposures that might arise.
  2. 2.As a general rule, a Bank’s measurement systems must incorporate interest rate risk exposures arising from the full scope of a Bank’s activities, including both trading and non-trading sources, to enable management to have an integrated view of interest rate risk across products and business lines. This does not preclude different measurement systems and risk management approaches being used for different activities.
  3. 3.A Bank’s interest rate risk measurement system must address all material sources of interest rate risk, including re-pricing, yield curve, basis and options risk exposures. While all of a Bank’s holdings must receive appropriate treatment, concentrations and instruments which might significantly affect a Bank’s aggregate position, must receive rigorous treatment. Instruments with significant embedded or explicit option characteristics must receive special attention.
  4. 4.At a minimum on a monthly basis, a Bank must prepare a maturity/re-pricing schedule with indicators of the interest rate risk sensitivity of both earnings and economic value, based on both a contractual and behavioral basis. Systemically important Banks must employ more sophisticated interest rate risk measurement systems, including simulation techniques.
  5. 5.In designing interest rate risk measurement systems, a Bank must ensure that the degree of detail about the nature of their interest-sensitive positions is commensurate with the complexity and risk inherent in these positions.
  6. 6.A Bank must also consider its dependency on various funding sources since a sudden withdrawal of these funds can have an adverse effect on earnings and economic value through basis risk, re-pricing risk and yield curve risk.