(1) Reasons for Proposal
The Basel Committee on Banking Supervision (BCBS) announced the standards for Interest Rate Risk in the Banking Book (IRRBB) (Apr. 2016), which revised the current Principles for the Management and Supervision of Interest Rate Risk (Jul. 2004);
○ to enhance the international consistency of the supervisory system and to advance the risk management system, which is necessary to reflect and implement this regulation in domestic regulations.
(2) Major Provisions
□ The calculation and management system of interest rate risk has been revised to replace the current calculation method with the standard method specified in Basel’s IRRBB (attached Table 9-1 of the Detailed Regulations on Supervision of Banking Business).
○ Change in capital (ΔEVE) and change in profit (ΔNII)* are specified as interest rate risk calculation indicators and indicate concrete standard calculation methods.
*ΔEVE: Change in Economic Value of Equity
ΔNII: Change in Net Interest Income
○ Realize the cash flow calculation method for interest rate sensitive assets and liabilities.
- Subdivide the maturity ranges (13 → 19)*, and calculate actual cash flow by reflecting customers’ behavior patterns such as early redemption of loans and termination of deposits.
* (Example) ｢0～1 month｣→｢1 day｣ and ｢1 day～1 month｣, and ｢6 months～1 year｣→｢6 months～9 months｣ and ｢9 months～1 year｣, etc.
◦ Diversify interest rate shock scenarios.
- Subdivide current increase and decrease shock scenarios (two scenarios) into six scenarios*, considering short and long-term interest rate fluctuations, and set the range of the shock by currency and period**.
*① Parallel increase, ② Parallel decrease, ③ Short-term decrease/long-term increase, ④ Short-term increase/long-term decrease, ⑤Short-term increase, ⑥Short-term decrease
**(Current) ±00bp shock for all currencies
→ (Revised) ±00bp for parallel in won (KRW), ±00bp for short-term, ±00bp for long-term, ±00bp for parallel in dollar (USD), ±00bp for short-term, ±50bp for long-term, etc.
○ Strengthen selection criteria for outlier banks
- Strengthen the selection criteria for outlier banks whose interest rate risk is considered excessive, “from 20% of equity” to “15% of Tier 1 capital.”
*(Current) Interest Rate Risk / Equity > 20% → (Revised) Interest Rate Risk / Equity > 15%
○ Mandatory Disclosure
- To improve consistency, transparency, and comparability in the calculation and management of the interest rate risk, make disclosures mandatory based on standardized forms*.
* The Basel Committee, at present, allows making a voluntary disclosure of interest rate risk, whereas the risk is disclosed as an item of management disclosure (matters that have a significant impact on bank management, such as risk management) under the Banking Act in Korea.
□ Revise the assessment items and the calculation standards for risk assessment quantitative indicators for banks and bank holding companies in accordance with the change in calculation indicators of interest rate risk (attached Table 9 of the Detailed Regulations on the Supervision of Banking Business and attached Table 8 of the Detailed Supervisory Regulations on Financial Holding Companies)
□ Reflect the amendments of interest rate risk calculation standard to standards for conducting stress tests (attached Table 19* of the Detailed Regulations on the Supervision of Banking Business).
* <attached Table 19> integrates and stipulates the provisions related to the stress tests by risk, which are scattered by the type of risk.
□ Revise the bank's management disclosure content and form in accordance with the standard disclosure form of the amendment to the interest rate risk calculation standard (attached Table 23 and Supplement No. 120 of the Detailed Regulations on the Supervision of Banking Business).
□Renew the work report related to interest rate risk in accordance with the amendment to the interest rate risk calculation standard (work reports No. B2909, B2909-1, etc., of the Detailed Regulations on the Supervision of Banking Business).
