Part B covered how internal risk transfer of credit and equity risk move from the banking book to the trading book — through a transaction-by-transaction exact-matching test against a real external hedge. Interest rate risk, or general interest rate risk (GIRR), is treated through a different mechanism entirely: not a matching test on individual transactions, but a structural requirement built around a dedicated trading desk. This part covers that mechanism in full.
The Setup: Hedging Banking Book Interest Rate Risk
Banks routinely carry interest rate risk in the banking book — for example, from the mismatch between the maturities of loans made and deposits taken. When a bank hedges this banking book interest rate risk exposure using an internal risk transfer with its trading book, the question is the same as before: when does the trading book leg of that internal transfer actually count as a genuine trading book instrument for market risk capital purposes?
Sourced from RBC25.25 (introductory text).
The Three Conditions
The trading book leg of a GIRR internal risk transfer is treated as a trading book instrument under the market risk framework if, and only if, all three of the following conditions are satisfied together:
| # | Condition | What It Requires |
| 1 | Documentation | The internal risk transfer must be documented with respect to the specific banking book interest rate risk being hedged, and the sources of that risk. |
| 2 | Dedicated desk | The internal risk transfer must be conducted with a dedicated internal risk transfer trading desk, which has been specifically approved by the supervisor for this purpose. |
| 3 | Standalone capital treatment | The internal risk transfer must be subject to trading book capital requirements on a standalone basis for the dedicated desk, kept separate from any other GIRR or other market risk generated by the trading book’s other activities. |
The logic behind these three conditions, taken together, is to prevent a GIRR internal risk transfer from being used as a loophole. Documentation ties the transfer to a genuine, identifiable banking book risk. Routing it through a dedicated, supervisor-approved desk means the bank cannot simply nominate any trading desk for this purpose — the desk itself has to be purpose-built and specifically approved. And the standalone capital treatment requirement means this desk’s GIRR position cannot be blended with, or hidden inside, the trading book’s other ordinary GIRR activity, which would make it harder to supervise and easier to game.
Sourced from RBC25.25(1)–(3).
| How This Differs From the Credit and Equity Rule in Part B For credit and equity risk, recognition depends on an exact match against a real external hedge, transaction by transaction. For GIRR, recognition instead depends on the internal transfer flowing through a specific, dedicated, supervisor-approved desk, with its own standalone capital treatment. There is no equivalent exact-external-hedge-matching requirement built into these three conditions themselves — the safeguard here is structural (a ring-fenced desk) rather than transactional (a matched external trade). |
What Happens on the Banking Book Side
Where the three conditions above are fulfilled, the banking book leg of the internal risk transfer must still be included in the banking book’s own measure of interest rate risk exposure for regulatory capital purposes. This is an important detail: satisfying the trading book side conditions does not make the banking book’s interest rate risk exposure disappear from the banking book’s own risk measurement — it continues to be measured there as well.
Sourced from RBC25.26.
Where the Dedicated Desk Gets Its External Hedges
The supervisor-approved internal risk transfer desk is not required to build its hedges purely from internal transfers — it can and typically will go to the market. The standard sets out two ways this can happen.
- Direct execution: the internal risk transfer desk transacts directly with external parties in the market.
- Execution via an agent desk: the internal risk transfer desk can instead obtain the external hedge from the market through a separate, non-internal-risk-transfer trading desk acting as its agent.
The second route comes with its own exact-matching condition: it is only permitted if the GIRR internal risk transfer entered into between the internal risk transfer desk and the agent desk exactly matches the external hedge that the agent desk sources from the market. Where this route is used, both legs are recorded appropriately — the respective legs of the GIRR internal risk transfer sit with both the internal risk transfer desk and the non-internal-risk-transfer (agent) desk.
Sourced from RBC25.27.
| Illustrative Walkthrough (Not From the Source Document) Route 1 — Direct: The dedicated GIRR internal risk transfer desk itself buys an interest rate swap directly from a market counterparty to hedge the banking book’s interest rate risk. Simple, two-party structure. Route 2 — Via an agent desk: The dedicated GIRR desk instead asks another trading desk (not itself an internal risk transfer desk) to go source that same interest rate swap from the market on its behalf. For this to count, the internal record between the GIRR desk and the agent desk must exactly match what the agent desk actually bought externally. Both desks then carry their respective legs of that arrangement. |
This walkthrough illustrates the two routes described in RBC25.27; the specific instrument (an interest rate swap) is our own example for clarity and is not stated in the source document.
https://www.bis.org/bcbs/publ/d457.htm
Summary: The GIRR Internal Risk Transfer Checklist
| Requirement | Satisfied? |
| Internal risk transfer documented against the specific banking book interest rate risk and its sources | Required |
| Transfer conducted through a dedicated, supervisor-approved internal risk transfer desk | Required |
| Standalone trading book capital treatment for the dedicated desk, separate from other GIRR/market risk activity | Required |
| Banking book leg still included in the banking book’s own interest rate risk measure | Always applies once the above conditions are met |
| If sourcing hedges via an agent desk: internal transfer exactly matches the agent’s external trade | Required only if using the agent-desk route |
Looking Ahead
With credit, equity, and interest rate risk transfers now covered, the final part of this mini-series turns to internal risk transfers that happen entirely within the trading book — between ordinary trading desks — and to a special, separate case: internal risk transfers involving the CVA (credit valuation adjustment) portfolio.
Frequently Asked Questions
How is a GIRR internal risk transfer different from a credit or equity one?
Credit and equity internal risk transfers require an exact-matching external hedge, transaction by transaction. GIRR internal risk transfers instead require routing through a dedicated, supervisor-approved trading desk with standalone capital treatment — a structural rather than transactional safeguard.
Does the banking book stop measuring interest rate risk once it’s hedged internally?
No. Even where all three GIRR conditions are met, the banking book leg of the internal risk transfer must still be included in the banking book’s own measure of interest rate risk exposure.
Can the dedicated GIRR desk use another desk to access the market?
Yes, via an agent desk, but only if the internal risk transfer between the GIRR desk and the agent desk exactly matches the external hedge the agent desk sources from the market.
https://decode-finance.com/category/market-risk-credit-risk-and-operational-risks