On 23 Dec 2025, the HKMA issued IR-1 V.3, updating its IRRBB supervisory framework effective 1 Jan 2026. The revised guidance mandates locally incorporated Als to report IRRBB exposures quarterly using six standardized interest rate shock scenarios, with enhanced focus on economic value impact and capital adequacy for 'outlier Als' (EVE decline >15% of Tier 1 capital). It clarifies reporting requirements for overseas exempted Als, standardizes NMD slotting methodologies, and strengthens expectations for risk measurement, stress-testing, and Board oversight of IRRBB management.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 23 Dec 2025, the Hong Kong Monetary Authority (HKMA) issued the revised Supervisory Policy Manual 'Interest Rate Risk in the Banking Book' (IR-1 V.3), superseding previous guidelines dated 2018 and 2024. This updated framework establishes the HKMA's supervisory approach to managing interest rate risk in the banking book (IRRBB) for authorized institutions (Als), effective from 1 January 2026.
Key Regulatory Changes
The revised framework updates the HKMA's supervisory expectations for IRRBB management, including the introduction of six standardized interest rate shock scenarios (parallel up/down, steepener, flattener, short rates up/down) for economic value impact assessment. It mandates locally incorporated Als to report IRRBB exposures via the 'Return of Interest Rate Risk in the Banking Book — MA(BS)12A' quarterly, with specific requirements for slotting cash flows, non-maturity deposits (NMDs), and behavioral optionality. The framework also clarifies that overseas incorporated Als exempt from Hong Kong's market risk capital regime may be required to implement the local IRRBB framework with reasonable notice.
Capital Adequacy and Supervisory Focus
Locally incorporated Als must integrate IRRBB into their capital adequacy assessment process (CAAP), with the HKMA particularly monitoring 'outlier Als' whose IRRBB exposures cause an economic value decline exceeding 15% of Tier 1 capital under any standardized shock. The HKMA will assess capital sufficiency based on factors including IRRBB exposure size, basis risk, embedded losses, and hedging effectiveness. For overseas incorporated Als not exempt from the local framework, the economic value approach (using the same six shocks) supplements earnings-based monitoring.
Reporting and Measurement Requirements
IRRBB-Reporting Als must submit detailed repricing positions by time bands and currencies, including breakdowns of fixed/floating/managed rate items, residential mortgage loans, and interest rate-sensitive off-balance sheet positions. The standardised framework requires Als to measure IRRBB exposure using the economic value (EVE) approach, with specific methodologies for slotting cash flows with optionality (e.g., retail fixed-rate loans, term deposits) and NMDs. Als must estimate behavioral maturity for NMDs using a two-step core deposit identification process, subject to defined caps on core deposit proportions and average maturities.
Oversight and Risk Management Expectations
The HKMA requires Als to establish robust IRRBB management frameworks, including Board oversight, Asset and Liability Management Committee (ALCO) responsibilities, and independent risk management. Als must implement risk measurement systems covering both earnings and economic value perspectives, with stress-testing covering the six standardized shocks and scenario-specific risks (e.g., basis risk, optionality). Internal controls must include regular independent validation of IRRBB models, with reports to the Board on aggregate exposures, limit compliance, key assumptions, and stress-test results at least semiannually.
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