Interest rate risk is said to be the largest market risk in the banking books. It reflects the extent to which its financial position is affected by fluctuations in market interest rates. However, several economic forces affect the level and direction of interest rates in the economy. This article briefly discusses the issues of interest rate risk management in the Indian banking scenario and several practices in managing them.

The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities established by the Central Bank Governors of 10 major economies in 1975. The committee meets regularly at the Bank for International Settlements (BIS) in Basel, Switzerland.

Under the Basel Capital Accord 1988, popularly known as Basel I, banks and financial institutions were stipulated minimum capital requirement. This accord mainly covered credit risk and later on included market risk calculations in arriving at minimum capital requirement. The first Basel accord only prescribed a minimum capital requirement for banks and failed to address the inherent risks in banking like operational risk, credit concentration risk, interest rate risk, business cycle risk, strategic risk, etc.

Basel II (also known as New Capital Accord) consists of three pillars of which the second pillar considers the Supervisory Review Process and covers the interest rate risk in banking book under market risk. This article tries to evaluate the Interest Rate Risk Management (IRRM) in banks under the New Capital Accord.

Treasury Management Magazine, Interest Rate Risk Management, IRRM, Bank for International Settlements, BIS, Operational Risk, Strategic Risk, Banking Business, Economic Development, Post-economic Liberalization, Interest Rate Risk, IRR, Banking Industry, Risk Management Process, Risk Management Policies, IRR Measurement Systems.