Module 10 Interest Rate Risk in the Banking Book Guidance

Summary

This is optional guidance issued by the Guernsey Financial Services Commission explaining how banks may complete Module 10 (Interest Rate Risk in the Banking Book) of the BSL/2 prudential return. It sets out a suggested methodology for measuring interest rate risk in the banking book and calculating capital to support that risk, but explicitly states the methodology is not prescriptive and banks may use an alternative approach.

• Purpose: Provides a non-mandatory methodology for banks to assess interest rate risk in the banking book and determine supporting capital, treated under Pillar 2 of the Basel II framework.
• Supervisory trigger: The Commission will pay particular attention where a standardised 200 basis point interest rate shock (or equivalent) causes economic value to decline by more than 20% of the sum of Tier 1 and Tier 2 capital, and may require risk reduction, additional capital, or both.
• Currency reporting thresholds: A separate report should be completed for each currency representing more than 25% of the bank's deposit liabilities; other currencies are aggregated into an 'other currencies' sheet; currencies under 5% of total deposit liabilities may be ignored, though the Commission can request individual currency reports at its discretion.
• Maturity band methodology: Detailed completion notes specify how to classify assets, liabilities, derivatives, and off balance sheet items into maturity/repricing bands (from sight to over 10 years) on a worst case basis, including treatment of accrued interest, non-interest bearing items, mortgages, deposits, and forward foreign exchange contracts.

Because the return module and methodology are described as optional and non-prescriptive, this document functions as explanatory guidance on preparing the interest rate risk return rather than a standalone binding rule, though it signals the capital and risk expectations the Commission will apply when reviewing submitted data.

Key obligations

• Where a bank chooses to use the Commission's suggested methodology, it should complete a separate Module 10 report for each currency representing more than 25% of its deposit liabilities, aggregate other currencies into an 'other currencies' sheet, and may disregard currencies below 5% of total deposit liabilities unless the Commission requests otherwise.
• Banks should classify assets, liabilities, and off balance sheet/derivative positions into the specified maturity/repricing bands on a worst case basis (assets at latest maturity, deposit liabilities at earliest) when preparing the interest rate risk assessment.
• Banks should agree with the Commission the treatment of undated assets of material value.

Applies to

banks