Interest rate risk in the baking book

Abstract

According to Basel Committee on Banking Supervision (2016), structural interest rate risk refers to the alteration of a company’s funding margin and/or asset value due to changes in interest rates. These changes affect current value and time profile of cash flows. Besides, a bank’s exposure to adverse movements is a risk tied to banking activities, which, in turn, may become an opportunity to create economic value. Therefore, structural interest rate risk in the balance sheet must be managed as stated by Basel Supervisory Committee, establishing thus principles for its identification, measurement, monitoring and control. This paper describes the main measurement models: earnings-based and economic value, as well as the standardised approach developed by the committee. Finally, it shows a comparative study of various Spanish banks.