Tool for managing interest rate risk in the banking book
Deloitte IRRBB Tool
Manage interest rate with flexible capabilities in efficient way
"Institutions should treat IRRBB as an important risk and always assess it explicitly and comprehensively in their risk management processes and internal capital assessment processes."
– EBA
Interest rate risk management is significant and important today, in rapidly changing market environment. Institutions should identify their IRRBB exposures and ensure that interest rate risk is adequately measured, monitored and controlled. Exposure to IRRBB should be measured regularly in terms of changes in economic value and earnings, in shock conditions related to different interest rates. The increasing requirements of regulators mean that banks need to increase the frequency of reporting, which often requires allocation of additional human resources and time, in addition to investing in new technologies and/or applications. Deloitte IRRBB Tool not only supports banks in this process, by helping them optimize the related costs, but may also be used in the day-to-day management of the interest rate risk.
The regulatory landscape for IRRBB and CSRBB is developing necessitating banks to accelerate internal discussions regarding IRRBB and CSRBB in terms of its definition and measurement approaches.
BCBS d368 IRRBB
04/2016
BCBS standards on IRRBB
Provide the basis for IRRBB management under Pilar II, including first definition of CSRBB.
EBA/GL/2018/02
07/2018
EBA Guidelines on IRRBB
Banks are required to identify, manage and measure IRRBB as well as incorporate assessment and monitoring of CSRBB exposures in regular management.
European Parliament and the Council/CRD V
12/2020
CRDV/Articles 84 and 98(5)
EBA shalll develop and issue updated Guidlines and RTS on the management of IRRBB and CSRBB, the standardised approach for IRRBB and revisions of the SOT.
EBA/GL/2022/14, EBA/RTS/2022/09, EBA/RTS/2022/10
10/2022
EBA new Guidelines and RTS on IRRBB and CSRBB
EBA defines the measurement of CSRBB as a separate risk class. The general governance related aspects are separately defined for CSRBB and are similar to those for IRRBB.
RTS on standardised approach specify criteria to identify a non-satisfactory IRRBB internal measurement system (IMS) that may lead to the mandatory application of the SA.
RTS on SOT include two important SOT-related changes: replacement of the 20% SOT by the 15% SOT for EVE and the introduction of the SOT for NII.
Implementation of new requirements from mid of 2023.
*We assume guarantee compliance with current regulatory requirements as part of the tool's license.
IRRBB Measurement - key methodological aspects, problems and challenges
"Institutions should identify their existing and prospective exposure to IRRBB in a proportionate manner, depending on the level, complexity and riskiness of the nontrading book positions they face, or an increasing risk profile taking into account their business model, their strategies and the business environment they operate in or intend to operate in."
– EBA
All banks must be able to model cash flows and subsequent market values for all balance sheet and off-balance sheet exposures under different interest rate scenarios, taking into account:
- selection of the yield curve,
- assessment of assumptions for revaluation,
- and modelling of future changes in volume.
Behavioral assumptions: all banks need to understand how changes in the interest rate environment change client behavior (prepayments, withdrawals, NMD balances) and measure the embedded option risk as well as the explicit
option risk.
In particular, institutions should measure and monitor the overall impact of key modelling assumptions on the measurement of the IRRBB in terms of both economic value and earnings measures.
"Following an audit conducted at our bank, we received a series of recommendations to take specific actions. These included regular interest rate risk reporting. Before, we have relied on simple, widely available solutions. The post-audit recommendations mean that we have to develop a new process, engage more people or invest in elaborate systems. We need something more than the simple solutions we have used thus far, yet we don’t have a budget to invest in a sophisticated tool. What we are looking for is a product that will allow us to manage the interest rate risk and optimize the related purchase and deployment costs at the same time."
- one of the recurring comments from our clients.
