IRRBB

Definition

IRRBB (Interest rate risk in the banking book) is the regulatory term for assessing Interest Rate Risk of regulated financial services firms (Banks) for exposures that are not accounted on a Mark-to-Market basis

Methodologies

• Economic value based, focusing on the valuation of instruments
• Earnings based, focusing on the cashflows of instruments

Regulatory Expectations

The effectiveness of banks ́ IRRBB management frameworks and the level of their interest rate exposures are key factors taken into account by supervisors when evaluating banks ́ capital adequacy under the SREP

In assessing IRRBB exposures, all supervisors expect banks to consider both economic value- and earnings-based measures supported by appropriate and reasonable behavioural and modelling assumptions. Supervisors assess the sufficiency and quality of data and the existence of robust modelling techniques.

Supervisors evaluate the development of appropriate IT systems and the soundness of the model validation process.

In addition, supervisors draw conclusions as to the suitability of the banks ́ models, taking into account their risk profile and their internal validation processes.

Regarding the economic value-based measures, some supervisors require banks to follow the standardised framework set out in the Committee’s standard; however, some supervisors require banks to follow it specifically in the case of inadequate IRRBB management techniques.

Some supervisors have adopted the standardised framework for regulatory reporting, disclosure and outlier identification purposes, while insisting on the internal measurement systems for risk management and the ICAAP.

In order to monitor banks’ IRRBB, all supervisors periodically receive regulatory reports. These reports typically include information on the impact of interest rate shock scenarios on the economic value of equity and net interest income. Supervisors use regulatory reports together with outlier tests and different economic and financial indicators to identify banks that have a high IRRBB exposure or complex risk profiles. With this information, supervisors typically request additional information from banks and hold further discussions. This analysis could trigger other supervisory actions or outcomes.

Finally, it is a common practice to draw on specialised teams to assist with the IRRBB supervisory assessments.