New rules to measure interest rate risk and a prolonged scenario of low market rates: evidence from Italian banks

To reflect changes in financial markets conditions, the Basel Committee on Banking Supervision has recently updated the standards to measure the interest rate risk in the banking book (IRRBB). The contribution of this paper to the prior literature and the current debate on the changes in the IRRBB regulatory framework is twofold: first, we investigate the impact of the new regulatory interest rate shock scenarios on banks’ risk positions; second, we detect banks’ exposure main determinants over a period that includes years of extremely low interest rates. Our empirical evidence is referred to a representative sample of Italian banks from 2006 to 2017. Though risk positions do vary among banks and over time, we find that overall interest rate risk remains small even by applying the new shock scenarios, which seem to be able to partly address some of the issues of previous regulation. Banks’ risk position is sensitive to the level, the slope and to the curvature swings of the yield curve, especially in the second half of the period we consider. Finally, changes in banks’ asset-liability composition induced by the non-conventional monetary policy operations do play a major role in explaining their exposure to interest rate risk.