Interest rate risk in the banking book: Bank Negara Malaysia's IRRBB proposals

What is interest rate risk in the banking book?

BNM's draft defines IRRBB as the current or prospective risk to a financial institution's capital and earnings from adverse movements in interest rates that affect its banking book. Rate changes alter the present value, and often the amount, of future cash flows on assets, liabilities and off-balance sheet items, and they change interest-sensitive income and expenses and so net interest income (NII).

For Islamic banking, the draft covers Rate of Return Risk in the Banking Book (RORBB), the Shariah-compliant equivalent, and treats references to interest rates as including profit rates. It names three main sources of IRRBB:

• Gap risk: from the timing of rate changes across the term structure of banking book instruments, whether shifts are parallel or not.
• Basis risk: from relative changes in rates for instruments with similar tenors priced off different rate indices.
• Option risk: from option derivatives or options embedded in products, such as a borrower's right to prepay or a depositor's right to withdraw.

What does BNM's IRRBB exposure draft cover?

The Exposure Draft (BNM/RH/ED 029-38) would apply to licensed banks, licensed investment banks, licensed Islamic banks and financial holding companies. It has three parts: qualitative principles for managing IRRBB, a quantitative Standardised Framework to measure and report it, and BNM's expectations for Pillar 2 capital allocation. When finalised it would supersede BNM's policy document on Reporting Requirements for Interest Rate and Rate of Return Risk in the Banking Book, issued on 30 June 2020.

BNM's Annual Report 2025 lists the draft among three Basel III exposure drafts issued in 2025, and describes the IRRBB standard as setting clearer expectations on oversight, controls and capital for interest and profit rate risk.

When will the IRRBB rules take effect?

The effective date is not yet set. The draft leaves the date to be specified in the final policy document, and says BNM plans to issue the final document in 2026, with the requirements taking effect 12 months after that. Its cover note says BNM proposes that the new rules come into force in 2027. Feedback was due by 30 January 2026, and banks were asked to complete a quantitative impact study.

The draft also proposes monthly entity-level and quarterly consolidated reporting, and asks for views on a 12-month parallel run, starting on the effective date, during which banks would submit both the current and new reporting templates. Check BNM's policy document listings for the final version and its date before relying on the draft wording.

What governance does the IRRBB draft expect?

The draft sets out seven principles. Banks would need a sound framework to identify, measure, monitor and control IRRBB, integrated with their wider risk management and business plan, and reviewed independently at least annually. Credit spread risk in the banking book (CSRBB) would also have to be identified, monitored and assessed.

• The board approves the IRRBB framework, risk appetite, limits and hedging strategies, and is informed of the level and trend of exposures at least quarterly.
• Senior management develops limit, escalation and hedging procedures, measurement systems, a stress testing framework, model governance and reporting.
• The risk appetite statement and IRRBB limits are reviewed at least annually, with limits applied at entity and consolidated level.
• Modelling assumptions, such as prepayment and deposit behaviour, must be sound, documented and tested, and data and models subject to independent validation.
• Regular discussion between the board, senior management and the Asset and Liability Committee (ALCO) is expected.

How is IRRBB measured: EVE and earnings?

Banks would measure IRRBB with both economic value and earnings-based measures. The draft requires the measurement system to quantify the impact of rate shocks on three measures:

• Economic value of equity (EVE): the net present value of assets, liabilities and off-balance sheet items, reflecting changes over the remaining life of positions.
• Earnings at risk (EAR): the ability to generate stable earnings, typically measured through changes in NII over a short to medium horizon.
• Fair value changes of banking book instruments held at fair value through other comprehensive income (FVOCI), which can hit capital directly.

What are the IRRBB shock scenarios?

Banks would test each significant currency against internally selected scenarios under their ICAAP, historical and hypothetical stress scenarios, any extra scenarios BNM specifies, and six specified shock scenarios: parallel up, parallel down, steepener, flattener, short rates up and short rates down.

Under the Standardised Framework, banks slot notional repricing cash flows into time buckets, calculate the change in EVE under each of the six scenarios by currency, include add-ons for automatic interest rate options, and derive the EVE measure. For the ringgit, the draft's parallel shocks are 200 basis points up and down, and the short rate shocks are 175 basis points at the overnight bucket, tapering to zero for maturities over 20 years.

What are the capital, outlier and disclosure requirements?

• Pillar 2 capital: banks would hold internal capital for IRRBB through their ICAAP, using at least the Standardised Framework EVE measure, and assess whether more is needed if the change in NII under the parallel scenarios leaves too little income for normal operations.
• Supervisory outlier test: a bank whose Standardised Framework EVE measure exceeds 15% of its Tier 1 capital, at entity or consolidated level, would be classed as an outlier and face closer supervision. BNM could require more capital, lower exposures, constraints on internal parameters or improvements to the framework.
• Disclosure: banks would publicly disclose their IRRBB exposures, including the EVE measure, and their management practices under BNM's Pillar 3 disclosure requirements. BNM plans a wider Pillar 3 review no earlier than 2028.

Interest rate risk training with Ogos Learning

Duration as a measure of interest rate risk, Basel III and interest rate swaps are covered in PKMC Module 4 (Risk Management & Basic Derivatives), which Ogos Learning offers as self-paced e-learning alongside Module 2 (The Money Market). Ogos Learning also runs treasury and financial markets training for bank teams. Ogos Learning has trained teams at more than 10 of Malaysia's licensed commercial banks.