Interest Rate Risk in the Banking Book

Interest Rate Risk in the Banking Book

The need for calculating and managing IRRBB (Interest Rate Risk in the Banking Book) have increased due to regulatory requirements. Particularly, BCBS 368 (in effect since April 2016) set pressure on banks to be able to disclose their IRRBB. This started from January 2018, based on 31 December 2017 figures.

The ECB stress test (submitted in April 2017 and based on the Basel requirements), the published EBA Pillar 2 Roadmap from April 2017 and information on all guidelines from national level regulators since then, point out that IRRBB should have focus in every bank.

As all banks differ in terms of balance sheets and business models, they also differ with regard to their expected behavioural models for items on their balance sheet. Naturally, this causes variations in setting the IRRBB rules and assumptions for each bank. In addition to the different balance sheet variations between banks, the requirements also vary between various international frameworks and national regulations.

An interesting difficulty from the supervisory point of view is comparability between the IRRBB figures. It could be tempting to use the so-called standardised frameworks for benchmarking purposes. Instead, as a standard model it has an important function providing a mutually understandable base for discussion between the banks and supervisors, allowing comparison between the bank’s own model and the standardised one. Depending on the balance sheet of the bank, the IRRBB figures calculated based on a standardised framework, national regulation and the bank’s own assumption might differ materially from each other.

These above-mentioned variations, as well as possible differences with regard to assumptions about rules, cause demand for flexibility from the solutions used for measuring and reporting IRRBB.

Managing IRRBB with MORS

Flexibility and user configurability in the MORS IRR Scenario Engine enable IRR managers to include various balance sheet scenarios, such as for Non Maturing Deposits (NMDs) or customer loans, and to compare those with different interest rate change scenarios. The effects of these scenarios are measured across key performance indicators, such as Earnings at Risk (EaR) and Economic Value of Equity (EVE).

Accordingly, managing IRRBB with MORS has given banks compatibility with the regulation since January 2018. In parallel with the regulation, it is also beneficial to monitor change scenarios on balance sheet items, as well as yield curve changes for internal steering purposes.

In addition to answering the needs for analysis and disclosure set for internal scenarios (for Governance, Limits and Planning purposes) and external requirements (Basel, ECB, EBA – EU CRD V), IRR managers can also use the data automation and scenario engine for performing stress testing scenarios. Examples of the relevant questions for stress testing are various sensitivity analysis of including and excluding Alternative models, Hedges, Capital, Margins, Pre-payments or 0-rate-floor.

Find out more about managing IRRBB in practice with MORS Asset Liability Manager.

Discover how banks are preparing for IRRBB in MORS IRR Management Survey.