BANK 8.1.5 Guidance

1 The Regulatory Authority expects a banking business firm to set quantitative and qualitative targets for IRRBB.
2 For rule 8.1.5(b), internal independent validation should be done by a function that is independent of the function that assumed or incurred the risk.
3 A firm's IRRBB management policy should provide for the following:
(a) the use of the output of the risk measurement under the policy to report the level of that risk to the senior management and governing body of the firm;
(b) the measurement to be capable of measuring the risk using the earnings approach;
(c) the measurement to be clearly defined and consistent with the nature and complexity of the structure of the firm's balance sheet;
(d) balancing cash flows as part of managing IRRBB;
(e) approval by the governing body, or a committee of the governing body, of any major hedging or risk-management initiatives.
4 The measurement of IRRBB should include all sources of the risk. The measurement should evaluate the effect of rate changes on earnings or economic value meaningfully and accurately.
5 Depending on the size and complexity of its banking book, the firm may also need to measure IRRBB using the economic value approach.
6 Effective risk measurement:
(a) should flag excessive exposures;
(b) should evaluate all significant interest rate risk arising from the full range of a banking business firm's assets, liabilities and off-balance-sheet positions, across both trading and banking books;
(c) should ensure that an integrated view of IRRBB across products and business lines is available to management; and
(d) should ensure accurate and timely data on all aspects of current positions.
Derived from QFCRA RM/2014-2 (as from 1st January 2015).