APRA has announced changes to banks’ interest rate risk management rules aimed at reducing the volatility in the Interest Rate Risk in the Banking Book (IRRBB) charge. This is a further response to bank failures in the United States and Europe earlier this year. Last month, APRA set out proposed changes to liquidity standards and in September it canvassed changes to the design features of additional tier 1 securities in response to its concerns that some current product features and market practices “create significant challenges or potentially undermine” their effectiveness in absorbing loss. Under prudential standard APS 117 IRRBB, banks that are classified as significant financial institutions must have an appropriate risk management and governance framework to manage the impact of changing interest rates on their businesses. Larger and more complex banks are required to hold capital against this risk. APRA’s proposed revisions to APS 117 include a change to the treatment of embedded gains and losses in the IRRBB capital charge, so that banks will have to notify APRA where the embedded gain component is material and explain how the bank is mitigating risks associated with these gains.  Other changes will affect earnings offsets, the banking book profile and observation frequency. And the regulator plans to extend certain requirements of the standard to non-significant financial institutions. APRA said in a statement: “Movements in interest rates impact the present value of future cash flows and the economic value of an authorised deposit-taking institution’s assets and liabilities, as well as income and expenses that are sensitive to interest rates. “IRRBB is a material risk to ADIs in Australia, given their balance sheets are generally concentrated in housing loans, retail deposits and high-quality liquid assets.” It said its proposed changes would have minimal capital impact, with expected IRRBB charges to be closely aligned with the capital charge under the standard as it operates now. In change to liquidity standards, APRA proposed that bank bills, certificates of deposit and debt securities issued by other ADIs will no longer be counted as eligible liquid assets for a large number of banks. The changes would have the biggest impact on ADIs that are subject to minimum liquidity holding rules, rather than banks using the liquidity coverage ratio regime. Mutual banks, credit unions and some small banks operate under the MLH regime, while the big banks, regionals and foreign banks operate under LCR rules. Under the current rules the value of liquid assets can be included in banks’ accounts at amortised cost rather than market value. APRA said unrealised losses can result in a weaker liquidity position than assumed. The revisions would ensure that ADIs on MLH value liquid assets at their market value. Unrealised losses would be deducted from capital for all ADIs. AT1 capital changes under consideration include restricting retail investor access to hybrids, changing distribution and loss absorbency rules and reducing the level of hybrid capital in a bank’s minimum regulatory capital.