rates have been very low for quite some time, and the insurance industry has had to deal with the consequences of an extended period of such low rates.: lines show the probability for an increase of at least the stated number of basis points (bps) in both the short-term and long-term rates. the bcbs uses the term “flattener” to correspond to scenarios in which longer-term rates decline by as much or more than short-term rates rise. new proposal by the Basel Committee on Banking Supervision for setting the amount of capital banks must hold against potential losses from interest rate risk uses only a few, very stylized scenarios. facilitate the evaluation of proposals, the following information should be submitted:Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education and experience bear on their qualifications to undertake the research.: lines show the probability for an increase in the short-term rate of at least the stated number of basis points (bps) and a decrease in the long-term rate by at least the same amount.

the numerical insights from applying these scenarios give bank risk managers information on the greatest sensitivities to interest rate changes and how to reduce them if needed. in addition, it allows us to readily generate the value-at-risk estimates often used to manage bank exposure to market risks (see bcbs 2011). “modeling yields at the zero lower bound: are shadow rates the solution?: lines show the probability for an increase in the short-term rate of at least the stated number of basis points (bps) and a decrease in the long-term rate by at least the same amount. the parallel shift scenarios provide insights into how a common rise in interest rates would affect a firm given its funding strategy, for example paying higher rates on deposits, and the duration of its loan portfolio, for example the sensitivity of loan values to interest rate changes. focus our analysis on the standardized approach, which uses specific interest rate scenarios to evaluate a firm’s banking book.

new proposal by the basel committee on banking supervision for setting the amount of capital banks must hold against potential losses from interest rate risk uses only a few, very stylized scenarios. (2015) to incorporate the likelihood of certain scenarios suggests that the scenarios specified by the bcbs are very unlikely to occur. new proposal by the Basel Committee on Banking Supervision for setting the amount of capital banks must hold against potential losses from interest rate risk uses only a few, very stylized scenarios. we find that the bcbs proposals can provide some basic insights into managing interest rate risk and might be appropriate for setting regulatory capital standards. interest rate risk insights derived from these two types of scenarios are complementary. by submitting a proposal, you agree to cooperate with the committee on finance research in publicizing or promoting the research and responding to media requests.

interest rate risk insights derived from these two types of scenarios are complementary. we assess two of the main scenario types in the proposal. however, since they emphasize unlikely interest rate scenarios, these proposals have important limitations when compared with more comprehensive interest rate modeling and risk management techniques. Committee for Finance Research would like to sponsor some independent research, also to include a current literature search, on the topic of dealing with a sudden rise in interest rates, and how this type of situation is being, or could be, modeled. the committee on finance research is responsible for the selection of the proposal to be funded. to the bcbs flattener proposal, we again follow the guidelines and consider a scenario in which the three-month treasury yield increases a minimum of 100 basis points, while the 30-year treasury yield decreases by at least the same amount.

in that regard, our results could help guide policymakers in determining whether the proposed standards meet the stated goal of setting “appropriate capital to cover potential losses from exposures to changes in interest rates.. short-term rates are near the zero lower bound, we consider only upward shifts of the yield curve. in this economic letter, we assess some of these proposals in the context of the probability-based stress-testing framework developed by christensen, lopez, and rudebusch (2015).” more generally, risk analysis based on a more complete modeling of scenarios provides a richer framework for setting bank capital standards and managing interest rate risk.. short-term rates are near the zero lower bound, we consider only upward shifts of the yield curve. instead, the fuller assessment would provide a more nuanced measure of a firm’s interest rate sensitivities.

. guaranteed minimum benefit utilization pattern, crediting rate strategies, new premium ) in a pop-up scenario? we then generate 50,000 simulations to ensure that the tails of the yield distributions are well represented. Instead, using a modeling framework with a plausible range of interest rate scenarios would be more relevant to help banks manage their interest rate risk. using a method that assesses not only potential yield curve changes but also incorporates the likelihood of various interest rate changes should provide a more comprehensive approach to managing interest rate risk. it is anticipated that all proposers will be informed of the status of their proposal by the end of october 2016. the bcbs uses the term “flattener” to correspond to scenarios in which longer-term rates decline by as much or more than short-term rates rise.