BANK 8.1.9 Stress-testing and interest rate risk in the banking book

(1) A banking business firm must carry out stress-testing of its exposures to IRRBB at intervals appropriate for the nature, scale and complexity of the firm’s business and for its risk profile. A firm with balance-sheet positions in 2 or more currencies must measure its risk exposure in each currency in which 5% or more of its banking book assets or banking book liabilities is denominated.
(2) The stress-testing:
(a) must determine the re-pricing gap between the firm’s assets and liabilities, before and after the effect of derivative instruments is taken into consideration; and
(b) must determine the sensitivity of the firm’s net interest income to a 200-basis-point change in interest rates in relation to the firm’s forecast banking book balance sheet.
(3) For subrule (2)(b), the Regulatory Authority may, in writing, specify another percentage or number of basis points.

Guidance

The risk of changes in the capital values of instruments resulting from changes in interest rates is taken to be market risk.
(4) The firm must include appropriate scenarios in its stress-testing to measure the firm’s vulnerability to loss under adverse interest rate movements.
(5) The firm must report to the Regulatory Authority, in the form that the authority directs, the results of its stress-testing.
(6) In determining the effect of a rate change on its net interest income, the firm must not assume that the rate will become negative.
Derived from QFCRA RM/2014-2 (as from 1st January 2015).