Document ID: chunk:federal_register_of_legislation:F2012L02334:body:0:p6
Version: federal_register_of_legislation:F2012L02334
Segment Type: other
Provision Reference: 
Character Range: 13416–16471

additional capital.

Interest rate risk in the banking book management framework

    22.         An ADI with internal model approval must have in place an IRRBB management framework that is sufficiently robust to facilitate quantitative estimates of its IRRBB capital requirement that are sound, relevant and verifiable. APRA must be satisfied that the ADI's IRRBB management framework is suitably rigorous and consistent with the complexity of its business. Where industry risk modelling practices evolve and improve over time, the ADI must consider these developments in assessing its own practices. Furthermore, the IRRBB measurement system must play an integral role in the ADI's risk management and decision-making processes and meet the requirements detailed in Attachment A. An ADI must also comply with the requirements relating to the Board of directors (Board) and senior management responsibilities in that Attachment.

Interest rate risk in the banking book measurement system

    23.         An ADI's IRRBB measurement system must:
       (a)          be conceptually sound, comprehensive, consistently implemented, transparent and capable of independent review and validation;
       (b)          be sufficiently comprehensive to capture all material sources of IRRBB across the ADI, including those events that can lead to rare and severe losses; and
       (c)          monitor the ADI's IRRBB risk profile in terms of earnings at risk and economic value sensitivity.
    24.         The IRRBB capital requirement under the internal model approach must cover repricing and yield curve risks and, unless APRA approves an exemption in writing (refer to paragraphs 25 and 26 of this Prudential Standard), basis risk and optionality risk.
    25.         Where an ADI is able to demonstrate to APRA that the potential loss from its exposure to basis and/or optionality risks is not significant when compared to the potential loss arising from repricing and yield curve risks, APRA may approve (at the time of approving the ADI's proposed internal model, or subsequently in writing) the exclusion of basis and/or optionality risks, as relevant, from the ADI's IRRBB regulatory capital.
    26.         An ADI with approval from APRA to exclude basis and/or optionality risks from its IRRBB regulatory capital must, at a minimum:
       (a)          review the level of its exposure to basis and/or optionality risks, as relevant, at least annually and provide the results of that review to APRA; and
       (b)          assess the impact of new products and changes to existing products, on its exposure to basis and/or optionality risks, as relevant, and report the details of that assessment to APRA where a significant change in its total exposure to basis risk and/or optionality risk is indicated.
    27.         For the purpose of determining the IRRBB capital requirement under the internal model approach, an ADI must use the economic value sensitivity approach to measure repricing and yield curve risks. For basis and optionality