IRRBB

Interest Rate Risk in the Banking Book

Interest Rate Risk in the Banking Book (IRRBB) has come under increased regulatory scrutiny in recent years, in particular with the introduction of the Standardised Approach and increased focus on Net Interest Income. Furthermore, the post-COVID sharp rise in interest rates has signified the need for precise management of interest rate risk. This combined development has culminated in the publishing of three regulatory documents:

EBA Guidelines on the management of IRRBB and CSRBB arising from non-trading book activities (EBA/GL/2022/14)

Regulatory Technical Standards on the standardised and simplified-standardised approaches (EBA/RTS/2022/09)

Regulatory Technical Standards on the Supervisory Outlier Test (EBA/RTS/2022/10)

"The EBA has developed a standardised (SA) and simplified standardised (S-SA) methodology for the purpose of the evaluation of the risks arising from potential changes in interest rates that affect both the economic value of equity (EVE) and the net interest income (NII) of an institution’s non-trading book activities."

Source: Regulatory Technical Standards on the standardised and simplified-standardised approaches (EBA/RTS/2022/09)

In response to this challenge, we have developed a set of PwC IRRBB checklists designed to assess regulatory compliance. The checklists are split into four Focus Areas: slotting of cash flows, calculation of Economic Value of Equity (EVE), calculation of Net Interest Income (NII), and IRRBB-related governance. The purpose of the checklists is to identify differences from the Standardised Approach, assess their relevance, and raise a flag if there is insufficient reasoning behind the difference. Using the checklists, a collection of findings and related recommendations is thus formulated. Each finding is consequently assigned a severity level on the High/Medium/Low scale to assist with prioritisation of future tasks.

Overview of the Focus Areas

Slotting of cash flows
Calculation of EVE
Calculation of NII
IRRBB-related governance

Slotting of cash flows

The correct allocation of cash flows into the time buckets is a crucial initial step in the calculation of both EVE and NII, making it essential for the management of IRRBB. The PwC IRRBB Checklists cover various instruments a bank may hold in its banking book. Furthermore, the regulation requires certain derogations to be applied when slotting cash flows for the NII calculation. These are also included.

Calculation of EVE

Utilising the PwC IRRBB Checklists allows for a thorough comparison of a bank’s EVE calculation with the regulatory Standardised Approach. This Focus Area covers all aspects of the calculation, including the consequent aggregate calculation itself (currencies, scenarios).

Calculation of NII

The structure of the PwC IRRBB Checklists ensures a comprehensive approach for benchmarking the current NII calculation implemented by a bank to the Standardised Approach. The assessment process begins by analysing the individual components of the NII calculation, followed by an assessment of the aggregate calculation of NII.

IRRBB-related governance

EBA/GL/2022/14 serves as the primary reference for the PwC IRRBB Checklists covering integral aspects of an effective IRRBB governance framework. Initiatives within this Focus Area include setting up the IRRBB management process, establishing procedures and assumptions for measuring IRRBB, and defining procedures for IRRBB risk allocation for Pillar 2 (ICAAP). Furthermore, one of the checklists is devoted to the Supervisory Outlier Test as described in EBA/RTS/2022/10.

Our Approach

Depending on your circumstances and needs, different approaches might be appropriate. Below are some examples of projects our team has delivered. We are happy to discuss your needs and design an approach accordingly. An important part of all possible approaches is the knowledge transfer from PwC Subject Matter Experts to the bank’s risk management function.

We deliver an assessment of the current methodology implemented by the bank.

We develop selected IRRBB models, including the draft of model documentation.

We provide consultations at the bank’s request and in the agreed-upon scope.

Case Study

We supported the internal audit of a CEE bank in assessing its IRRBB models. The bank used EVE and NII to measure its interest rate risk in its banking book. In addition to the interest-rate-sensitive cash flows from the bank’s portfolio, both of these models also included the following behavioural options:

Non-maturing deposits
Fixed rate loans subject to prepayment
Term deposits subject to early redemption
Committed retail loans

Project Phases

We used the PwC IRRBB Checklists and the bank’s relevant internal documents to perform the initial assessment against the regulatory benchmark of the Standardised Approach.

We identified a relevant sample of transactions based on the bank’s product portfolio to verify whether the internal documentation was correctly implemented.