The manner in which credit institutions accept and transform interest rate risk significantly affects their income and risk situation. In view of changing framework conditions, it has become a matter of economic necessity to develop effective systems for limiting and managing interest rate risk. The fact that the interest rate risk in the banking book is increasingly becoming a major concern in the context of aggregate risk management by banks is also reflected by the new supervisory framework (Basel II). This source of risk is now explicitly mentioned for the first time in the Bankwesengesetz (BWG; Austrian Banking Act) in connection with general duties to apply diligence. The Oesterreichische Nationalbank (OeNB) and the Financial Market Authority (FMA) have recently presented a joint guideline on these topics.
“In many cases, the interest rate risks in the banking book represent the most significant source of market risk for banks. For this reason, it is vitally important to establish suitable risk management systems,” OeNB Governing Board member Josef Christl noted. Helmut Ettl of the FMA Executive Board added, “The extent to which plans and procedures are indeed appropriate depends in each case on the scope and complexity of the particular bank’s transactions.” The Basel Committee on Banking Supervision had originally planned to include the interest rate risk in the banking book under Pillar I of the Basel framework. Yet, in view of the heterogeneity in terms of processes for monitoring and managing interest rate risk, the Committee came to the conclusion that at present it would be best to treat this topic under Pillar II. Mr Pribil of the FMA Executive Board additionally pointed out that, “Credit institutions are responsible for consistently ensuring, by means of ICAAP (Internal Capital Adequacy Assessment Process), that their interest risk positions are adequately covered.”
The recently published guidelines treat in detail the topic of managing interest rate risk in the banking book. Following the introduction to the subject, a separate section is dedicated to relevant supervisory background knowledge, including the assessment and treatment of interest rate risk in the course of banking supervision. The following section offers a critical evaluation of the theoretical approaches to the measurement and management of interest rate risk. Proceeding from this analysis, the significance of an integrated management of interest risk books is discussed, which takes into account all forms of interest rate risk. A separate section provides a step-by-step description of the process for implementing such integrated interest rate book management, taking account of the supervisory requirements and framework conditions. In the light of an appropriate risk strategy, options for modelling transactions in the systems, methods for carrying out a yield and risk analysis as well as measures for optimising risk positions are presented in greater detail.
“In compiling these guidelines we paid special attention to presenting the material in a way that would appeal to a very broad spectrum of readers, so as to be able to provide as many banks as possible with assistance in devising their risk management systems,” OeNB Director Christl stated. FMA Executive Director Ettl added, “In presenting these guidelines we hope to contribute towards developing a common understanding between supervisors and credit institutions regarding the management of interest rate risk in the banking book.”
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