Interest rate risk modeling: comparison between the regulatory framework and the internal management approach

The main goal of my thesis is the interest rate risk calculation by means of the Basel regulatory framework, following the so called standard approach under the second Pillar provided by Basel Committee on Banking Supervision in 2004, and through an example of internal management model which takes into account a behavioral component in addition to the regulatory one. It has been widely demonstrated that the use of different interest rate risk modeling criteria can affect the size of the risk indicator, bringing to light a possible overestimation or, as resulted from my analysis, an underestimation of the risk in question stemming from the standard approach. I have decided to deal with this issue because an underestimation of the risk would represent a serious threat to the overall banking stability, whereas the opposite case could reduce the economy’s credit supply. Faced with these considerations, the importance of an accurate modeling of the interest rate risk by means of a developed internal methodology is confirmed.