Document ID: chunk:federal_register_of_legislation:F2012L02334:body:0:p3
Version: federal_register_of_legislation:F2012L02334
Segment Type: other
Provision Reference: 
Character Range: 5461–8420

of which an ADI is a member that do not form part of the group, for determining such capital on a Level 2 basis.

Definitions

    7.             The following definitions are used in this Prudential Standard:
       (a)          basis risk - the risk of loss in earnings or economic value arising from differences between the actual and expected interest margins on banking book items, where 'margin' means the difference between the interest rate on the items and the implied cost of funds for those items;
       (b)          earnings at risk - the potential impact of interest rate changes on the net interest income and non-interest income (and expense) earned on the ADI's banking book;
       (c)          economic value sensitivity - the potential impact of interest rate changes on the present value of all future cashflows arising from the ADI's banking book items, including the economic value of non-interest cashflows;
       (d)          IRRBB - the risk of loss in earnings or in the economic value on banking book items as a consequence of movements in interest rates. For the purposes of this Prudential Standard, reference is made to the IRRBB components of repricing risk, yield curve risk, basis risk and optionality risk;
       (e)          IRRBB capital requirement - the Regulatory Capital that an ADI is required to hold against its exposure to IRRBB in accordance with this Prudential Standard;
       (f)           IRRBB management framework - the organisational structures, processes and systems used in identifying, assessing, measuring, monitoring, controlling and mitigating IRRBB;
       (g)          IRRBB measurement system - the systems and data of the IRRBB management framework used to measure IRRBB;
       (h)          optionality risk - the risk of loss in earnings or economic value due to the existence of stand-alone or embedded options[1], to the extent that the potential for those losses is not included in the measurement of repricing, yield curve or basis risks;[2]
       (i)            repricing risk - the risk of loss in earnings or economic value caused by a change in the overall level of interest rates. This risk arises from mismatches in the repricing dates[3] of an ADI's banking book items; and
       (j)            yield curve risk - the risk of loss in earnings or economic value caused by a change in the relative levels of interest rates for different tenors (that is, a change in the slope or shape of the yield curve). Yield curve risk arises from repricing mismatches between assets and liabilities[4].

Key principles

    8.             An ADI that has received model approval from APRA for IRRBB must:
       (a)          have in place a robust IRRBB framework and a conceptually sound IRRBB measurement system; and
       (b)          hold regulatory capital commensurate with its exposure to IRRBB.

Approval process

    9.             An ADI that has sought model approval from APRA