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"Do we think this is feasible? To tell you the truth, I hope not, because what they have come up with so far doesn't really show very satisfactory solutions," said Michaela Zattler, division manager for banking supervision at Germany's Bundesverband deutscher Banken (BdB), speaking at the Liquidity and Funding Risk conference in London on October 1.
Interest rate risk in the banking book broadly covers the sensitivity to rate movements of loans and deposits, as well as fee income. The risk profile can vary dramatically from bank to bank and market to market, however, which is why capital requirements are currently a matter for supervisory discretion.
The Basel Committee on Banking Supervision set up a task force last year to look at options for an explicit charge – a so-called Pillar I measure. The BdB's Zattler, who has been involved in the consultation process, said the current proposals combine two methods for measuring interest rate risk and will feature four stress scenarios.
Banks traditionally measure interest rate risk in the banking book using either an economic value or earnings-based approach. The earnings-based approach focuses on the effect a change in interest rates can have on net interest income and non-interest income and expenses such as fees, while the economic value approach considers the potential impact of interest rate changes on the present value of future cashflows.
According to Zattler, the Basel working group is considering a "static economic value" approach with an "earnings-based overlay". The problem with this, she said, is that the two different approaches can yield significantly different results.
Léon Boogerd, part of the asset and liability management team in group treasury at Deutsche Bank, questioned whether a single measurement model will be able to take into account embedded options that mean the maturity of an exposure can differ wildly from its contractual maturity, citing the example of the prepayment option given to mortgage borrowers.
The BdB's Zattler said a proposal for a Pillar I charge will be released later this year, which will be followed by a quantitative impact study.
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