Treatment of Interest Rate Risk in the Banking Book in LA

Interest rate risk in the banking book (IRRBB) is a bank’s exposure to adverse movements in interest rates and the associated risk to its capital and earnings. Fluctuations in interest rates affect the time path and the present value of future cash flows. In response, the economic value of a bank’s assets and liabilities change. This risk is inherent to the banking business. However, high levels of exposure to IRRBB can pose a significant threat to a bank’s viability. It is therefore important to establish sound supervisory assessments and, potentially, capital requirements for this type of risk.