Interest rate risk in the banking book: challenges and opportunities in its management

What it is about

Cristina Pailhé, consultant, explained at the Third Annual Risk Conference (September 19, 2025) what interest rate risk in the banking book (IRRBB) is, how it is measured and what the Basel Committee standards require.

The 42 slides define IRRBB, distinguish it from trading book risk, review the interest rate context before and after the pandemic, explain its types (gap, basis and option risk), the economic value and earnings measures, the Basel Committee's 2016 management principles and the standardized framework, with its six interest rate shock scenarios, and close with reflections.

Objectives

• Define IRRBB and distinguish it from the market risk of the trading book.
• Explain the measures of impact on economic value and on earnings.
• Present the Basel principles and the standardized framework for measuring and managing it.

Key takeaways

1. IRRBB is the current or future risk, to capital and earnings, from changes in interest rates on banking book positions.
2. Basel distinguishes the banking book from the trading book, and banks must clearly define which positions they include in each.
3. The types of IRRBB arising from changes in the yield curve are gap risk, basis risk and option risk.
4. There are two complementary measures: the change in the economic value of equity (ΔEVE) and the change in net interest income or earnings (ΔNII); both depend on the assumptions adopted.
5. The standardized framework uses six shock scenarios (parallel increases and decreases, changes in slope and changes in short rates), with shocks calibrated by currency and recalibrated in July 2024.