INTEREST RATE RISK IN BANKING BOOKS (IRRBB): A REVIEW OF NON-PARALLEL YIELD CURVE SHOCKS AND CAPITAL OPTIMIZATION STRATEGIES IN U.S. BANKS

Interest Rate Risk in the Banking Book (IRRBB) focusing on cliff implications of non-parallel yield curve shocks as well as capital optimization methods at American banks. The review provides a theoretical background to IRRBB, and four key types of non-parallel yield curve movements that banks may be subject to (yield curve steepening, flattening, twisting and butterfly shifts), discusses the potential impact of these shocks on banks' earnings, Economic Value of Equity (EVE), Net Interest Income (NII), liquidity, regulatory capital as well as how these risks interact with existing advanced Asset-Liability Management (ALM) frameworks designed to support effective mitigation measures. Based on current literature and regulatory outlook, the study reveals that methods of measuring interest rate risk based on parallel shifts in the yield curve are becoming more inadequate as there is little to no resemblance to modern banking environments. Integrated risk management, behavioral deposit modelling, dynamic balance sheet optimization, stress testing and derivative-based hedging strategies can increase banking resilience as well as the ability to preserve capital and comply with regulatory requirements. The study suggests that forward looking and technology driven IRRBB management frameworks are needed to improve financial stability, and appropriate long-term sustainability of U.S. banks, because interest rates that stay volatile for long can adversely impact both economic health and medium-term bank profitability in the face of shocks affecting macroeconomic conditions.