Interest Rate Risk in the Banking Book

Over the past decade the Basel Committee on Banking Supervision (the Basel Committee) has released a number of consultative documents discussing the management and supervision of the interest rate risk inherent in a bank’s balance sheet. The Committee’s most recent release on this topic forms part of the proposed New Basel Capital Accord (the New Accord), which comes into effect in 2007, and details a capital adequacy framework for interest rate risk in the balance sheet as well as a suggested supervisory methodology. This article provides an outline of this framework and discusses the implications for licensed banks, credit unions and building societies [collectively referred to as Authorised Deposit Taking Institutions (ADIs)] operating in Australia. The article describes some of the risk management practices currently employed by Australian ADIs for managing this risk and considers APRA’s plans for incorporating interest rate risk into the supervisory capital regime.