Interest rate risk in the banking book cInterest rate risk in the banking book capital requirement

Interest rate risk in the banking book capital requirement

1. An ADI’s IRRBB capital requirement, as determined by its internal model, must be calculated as:

2. the amount estimated for repricing and yield curve risks which is the estimated 99th percentile of EV0 minus EV1 (refer to paragraph 13 of this Attachment); plus

3. the amounts estimated for basis and optionality risks as detailed in paragraphs 19 to 23 of this Attachment, except where the ADI has written approval from APRA to exclude basis and/or optionality risks; less

4. any amount resulting from assumed diversification benefits between repricing and yield curve risks, basis risk and optionality risk; plus

5. the embedded loss (or embedded gain if this amount is negative) which is defined as the sum of the book value of all banking book items minus EV0

subject to the capital requirement not being less than zero.

1. An ADI may only incorporate diversification benefit estimates if the ADI can demonstrate to APRA, using robust quantitative and qualitative analysis, that its correlation estimates are appropriate and take into account the uncertainty surrounding any such estimates (particularly in periods of stress).