Governance and the interest rate risk in the banking book management framework
Responsibilities of the Board of directors and senior management
An ADI’s Board is responsible for the overall IRRBB profile of the ADI and its IRRBB management framework. Accordingly, the Board must make clear its appetite for this risk, including IRRBB exposure limits. The Board or a Board committee must be actively involved in the oversight of the ADI’s approach to managing and measuring IRRBB.
An ADI’s IRRBB management framework must be approved by the Board, or a Board committee. In the latter case, the committee must have clearly defined responsibilities, thresholds for reporting to the Board and performance obligations. The approved framework must clearly articulate respective responsibilities and reporting relationships.
To ensure the continued effectiveness of the IRRBB management framework, the Board, or Board committee, must ensure the framework is subject to periodic validation and review (refer to paragraphs 18 and 19 of this Attachment) by a suitable independent party.
An ADI’s Board, or Board committee, must review IRRBB management reports (refer to paragraphs 13 to 15 of this Attachment) on a regular basis and satisfy itself that this risk is appropriately managed.
Senior management must have a thorough understanding of the ADI’s IRRBB management framework (to the extent that it relates to risk areas within their responsibilities), be actively involved in its implementation and ensure its effective operation over time. To facilitate this, the ADI must have in place an executive committee, with appropriate representation from across the ADI, which focuses on the management and measurement of IRRBB. The executive committee must hold regular meetings to discuss matters including the performance of the framework, areas requiring improvement and the status of efforts to address previously identified deficiencies.
The ADI must have an independent IRRBB management function that complies with the requirements in this Attachment. This function must have a suitable independent reporting line, providing access to the executive committee referred to in paragraph 5 of this Attachment.
Senior management must, in conjunction with the IRRBB management function referred to in paragraph 6 of this Attachment, develop appropriate policies relating to the risk management framework. Management is responsible for translating these policies into specific procedures and processes to facilitate implementation and verification within the ADI’s business operations. Senior management must provide notice to the Board, or Board committee, of material changes or exceptions from established policies that could have an impact on the operation of the IRRBB management framework, including the IRRBB capital requirement.
Part Governance and the interest rate risk in - Banking (prudential standard) determination No. 4 of 2024 - Governance and the interest rate risk in the banking book management framework | Zoe
Sufficient resources
An ADI must have sufficient numbers of personnel skilled in the management and measurement of IRRBB to ensure that its IRRBB management framework continues to operate effectively.
Interest rate risk in the banking book risk management function
An ADI must have an independent specialist IRRBB management function (function) that complies with the requirements set out in this Attachment. This function must:
have reporting lines and responsibilities that are independent of the activities that contribute to the ADI’s IRRBB profile;
have all roles and responsibilities of people and functions involved in the management of IRRBB clearly defined and documented;
have responsibility for the design and maintenance of an ADI’s IRRBB management framework, and for ensuring its implementation; and
continuously monitor the ADI’s compliance with the framework and produce and analyse regular reports on the output of the internal model.
Documentation of interest rate risk in the banking book framework
An ADI’s IRRBB management framework must be clearly documented.
Documentation relating to the IRRBB measurement system must be comprehensive and provide a level of detail sufficient to ensure that an ADI’s approach to determining its IRRBB capital requirement is transparent and capable of independent review and validation.
An ADI’s technical documentation relating to its IRRBB measurement system must include the following information:
the rationale for all assumptions and specifications underpinning the IRRBB measurement system;
the analytics and relevant theory behind all calculations;
details of interest rate model parameters and assumptions, and any other assumptions made, whether implicitly within the model or explicitly as inputs to it, when modelling each component of IRRBB, including the ADI’s justification for their use and the processes undertaken for checking and validating those assumptions;
an explanation of how the ADI ensures that the required soundness standard (refer to paragraph 30 of this Prudential Standard) is achieved; and
details of dependence structures used in the measurement system, including evidence supporting their use.
Internal reporting of interest rate risk in the banking book exposures
An ADI must implement a process to regularly monitor its IRRBB profile. To support the proactive management of this risk, there must be regular reporting of relevant information to the Board, or Board committee, and senior management.
In developing an appropriate reporting framework, an ADI must consider the nature of its IRRBB exposure and the strategy adopted for managing and measuring it. Management reports must be produced and reviewed regularly and include information on the output of the ADI’s internal model, limit utilisation and the performance of risk management strategies. The reviews must be conducted by a level of management with sufficient seniority and authority to enforce, where necessary, mitigation of the ADI’s exposure to IRRBB.
An ADI must have in place a process for ensuring that the ADI’s Board, or Board committee, and senior management are able to respond appropriately to the information contained in IRRBB management reports. This process must include escalation procedures for key IRRBB issues to facilitate appropriate action between formal reporting cycles.
Integration of the interest rate in the banking book measurement system into day-to-day risk management
An ADI’s IRRBB measurement system must be closely integrated into the ADI’s risk management processes. This requires that the inputs and outputs of the ADI’s measurement system, as relevant, play an integral role in the ADI’s decision-making, corporate governance, risk management and internal capital allocation processes.
IRRBB exposure limits must be related to the ADI’s internal model in a manner that is consistent over time and well understood by senior management.
Independent review of the interest rate risk in the banking book management framework and measurement system
An ADI’s IRRBB management framework (including the IRRBB measurement system) must be subject to effective and comprehensive independent review both initially (that is, at the time the model approval is sought) and then on an ongoing basis, to ensure the continued integrity of the framework. Such reviews must be conducted by functionally independent, appropriately trained and competent personnel, must cover both the activities of relevant business units and of the IRRBB management function and must take place at least once every three years or when a material change is made to the framework.
For the purpose of paragraph 18 of this Attachment, ‘functionally independent’ means that:
the party or parties conducting the reviews do not contribute to the ADI’s IRRBB profile through the origination or alteration of risk; and
the party or parties conducting the reviews must not be involved in the development, implementation or operation of the IRRBB measurement system, or be part of, or report to the risk management function referred to in paragraph 6 of this Attachment.
It is not necessary that the same party undertake all aspects of the review[6].