Document ID: chunk:federal_register_of_legislation:F2024L01181:body:0:p7
Version: federal_register_of_legislation:F2024L01181
Segment Type: other
Provision Reference: 
Character Range: 16897–19885

regulatory capital for these risks, no particular measurement technique is prescribed (although APRA may do so under paragraph 19 of Attachment B in certain cases).
     2.          An ADI's IRRBB measurement system must take into account the impact that past interest rate movements may have on its future earnings. In particular, the ADI must give consideration to embedded gains or losses[5] in banking book items that are not accounted for on a marked-to-market basis. The IRRBB regulatory capital must include the effect of embedded gains or losses.
     3.          As part of the model approval process, an ADI must be able to demonstrate the appropriateness of the IRRBB capital requirement as determined by its internal model and commensurate with its IRRBB profile. An ADI must justify to APRA any changes in the calculated capital requirement as part of its ongoing use of an internal model.
     4.          An ADI must be able to demonstrate that its IRRBB capital requirement, as determined by its internal model, meets a soundness standard based on a 99 per cent confidence level and a one-year holding period (the soundness standard). This soundness standard provides significant flexibility for an ADI to develop an IRRBB measurement system that best suits the nature and complexity of its activities.
     5.          To estimate repricing and yield curve risks, an ADI must make repricing assumptions regarding the repricing of banking book items that do not have a contractually defined repricing date or where there is potential for significant variation between contractual and actual repricing dates due to, for example, embedded optionality in banking book products. These repricing assumptions must:
             1.           specify one or more repricing dates and the principal amounts assumed to reprice on each of those dates; and
             2.           be clearly documented and supported by appropriate analysis.
    APRA will review the appropriateness of an ADI's repricing assumptions and may, in writing, determine that an ADI must use different assumptions for the purpose of determining its IRRBB capital requirement.
     1.          An ADI's IRRBB capital requirement must be calculated on at least a quarterly basis to ensure it adequately reflects its risk profile.
     2.          An ADI with model approval must meet the quantitative standards for measuring the capital requirement for IRRBB as detailed in Attachment B.

Attachment A

Governance and the interest rate risk in the banking book management framework

Responsibilities of the Board of directors and senior management

     1.              An ADI's Board is responsible for the overall IRRBB profile of the ADI and its IRRBB management framework. Accordingly, the Board must make clear its appetite for this risk, including IRRBB exposure limits. The Board or a Board committee must be actively involved in the oversight of the ADI's approach to managing and measuring IRRBB.