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Introduction

C 165/2019 STA
  1. 1.These Standards form part of the Interest Rate and Rate of Return Risk in the Banking Book (IRRBB) Regulation. All Banks must comply with these Standards, which expand on the Regulation. These Standards are mandatory and enforceable in the same manner as the Regulation.
  2. 2.Banks offering Islamic financial services must apply the same principles to address rate of return risk.
  3. 3.IRRBB is a normal part of banking and can be an important source of profitability and shareholder value to a bank. However, excessive IRRBB can pose a significant threat to a Bank’s earnings and capital base. Changes in interest rates affect a Bank’s earnings by changing its net interest income and the level of other interest-sensitive income and operating expenses. Changes in interest rates also affect the underlying value of a Bank’s assets, liabilities and off-balance sheet items, as the present value of future cash flows change. Accordingly, an effective risk management process that maintains IRRBB within prudent levels is essential to the safety and soundness of a Bank.
  4. 4.A Bank’s Board is in ultimate control of the bank and accordingly ultimately responsible for the bank’s approach to IRRBB. There is no one-size-fits-all or single best solution. Accordingly, each bank could meet the minimum requirements of the Regulation and Standards in different ways and thus may adopt an organizational framework appropriate to the risk profile, nature, size and complexity of its business and structure. The onus is on the Bank’s Board to demonstrate that it has implemented an approach that adequately addresses IRRBB. Banks are encouraged to adopt leading practices that exceed the minimum requirements of the Regulation and Standards.1
  5. 5.The Standards follow the structure of the Regulation, with each article corresponding to the specific article in the Regulation.

1 The Central Bank will apply the principle of proportionality in the enforcement of the Regulation and Standards, whereby smaller banks may demonstrate to the Central Bank that the objectives are met without necessarily addressing all of the specifics cited in the Standards.