A comprehensive guide to Interest Rate Risk in the Banking Book (IRRBB)

A closer look at the CRR III/CRD VI Banking package

August 05, 2024

The Interest Rate Risk in the Banking Book (IRRBB) is a risk framework that helps banks identify, manage and mitigate risks associated with adverse changes in interest rates in the banking book. In this guide, we have summarised the regulatory reporting requirements for IRRBB as part of the new ITS on IRRBB, providing banks with a clear understanding of the procedure involved.

Reporting overview

The EBA ITS on IRRBB reporting provides standardised reporting templates to enhance the comparability, transparency and management of interest rate risk across banks, where all interest-bearing banking book items are in scope.

These standardised templates ensure consistent and comprehensive data submission, allowing competent authorities to facilitate adequate assessment of credit institutions’ IRRBB exposures. Furthermore, the reporting templates include sections for interest rate gap analysis, a detailed breakdown of a Bank’s EVE and NII measures, key assumptions and scenarios, and behavioural adjustments.

The reporting framework ensures enhanced granularity when it comes to the required reporting. This includes:

A breakdown of repricing cash flows for product types with fixed and variable interest rates.

The provision of separate templates per material currency for different modelling approaches (contractual or behavioural).

The reporting requirements vary in granularity across different types of institutions, with large institutions requiring more detailed reporting compared to 'other' institutions and small and non-complex credit institutions (SNCIs).

The structure in regulatory reporting

To ensure a comprehensive and accurate reporting process, there are five sets of regulatory reporting templates for IRRBB. These templates cover the evaluation of IRRBB metrics, breakdown of sensitivity estimates, repricing cash flows, relevant parameters on behavioural modelling and qualitative information. Each set of templates caters to the specific needs of different types of institutions, ensuring that banks can navigate the reporting process effectively.

Overview of reporting templates

Template ID	Reporting frequency	Title	What you should know
J 01.00 – All institutions	Quarterly	Valuation of the IRRBB: EVE/NII SOT and MV Changes	Applicable to all institutions. Summary IRRBB metrics: ΔEVE relative to baseline for each of the 6 scenarios. ΔNII relative to baseline for each of the 2 scenarios. Additional information on the MV changes. Separate templates are required for each material currency.
J 02.00 “Large” J 03.00 “Other” J 04.00 “SNCI”	Quarterly	Breakdown of sensitivity estimates	IRRBB metrics. Baseline EVE and the ΔEVE for each product type, per the 6 EBA shock scenarios. Baseline NII and the ΔNII for each product type, per the 2 EBA shock scenarios for NII. Baseline market value of the Bank’s fair valued instruments maturing after the NII time horizon and the change in market value for each product type (if applicable), per the 2 EBA shock scenarios for NII. Calculation for duration per line item. Row information (balance sheet line items) for ‘other’ institutions are in a more condensed form, whereas for “SNCI” the aggregation is at the highest level, i.e., total on-balance and off-balance sheet assets and liabilities. Separate templates are required for each material currency.
J 05.00 “Large” J 06.00 “Other” J 07.00 “SNCI”	Quarterly	Repricing cash flows	Repricing cash flow information. Bucketing of repricing cash flows per product type shown separately for both, fixed and floating rate instruments. Additional metrics per line item regarding the carrying value (such as % with embedded or explicit automatic optionality, % subject to behavioural modelling, weighted average yield, weighted average maturity) Row information (balance sheet line items) for ‘other’ institutions are in a more condensed form, whereas for “SNCI” the amounts are aggregated in major balance sheet categories. The required granularity for non-maturity deposits remains the same for all institutions. Separate template templates are required for each material currency per modelling approach: contractual/behavioural.
J 08.00 “Large” J 09.00 “Other” and “SNCI”	Quarterly	Relevant parameters	Information on behavioural modelling applicable for each of the 6 shock scenarios. Information on the relevant parameters per product type Row information (balance sheet line items) for ‘other’ and “SNCI” institutions are required in a more condensed form. Separate templates are required for each significant currency.
J 10.00 “Large” J 11.00 “Other” and “SNCI”	Annually	Qualitative information	General qualitative information on: EVE methodology NII methodology Scope/materiality thresholds Other qualitative information Row information (balance sheet line items) for ‘other’ and “SNCI” institutions are required in a more condensed form. Separate templates are required for each significant currency

Specific challenges that necessitate sophisticated modelling techniques and robust data management practices to ensure adequate and compliant IRRBB reporting (depending on the materiality of the positions). These are either auxiliary models whose outputs are utilised as inputs to the main models, or additional metric indicators as required by the regulation.

Sophistication in IRRBB models

Determining the behavioural patterns of Non-Maturity Deposits (NMDs) can be a complex task and for this reason, banks should develop internal models to capture behavioural aspects of their clients in volatile interest rate environments.

Assessing the risk of early repayments on fixed-rate loans adds an additional level of complexity, as borrowers' behaviour in response to interest rate changes can significantly impact cash flow predictions. As such, it should encompass a sophisticated modelling approach to adequately measure prepayment volumes.

Predicting the likelihood and timing of early deposit redemptions introduces further uncertainty, complicating the estimation of future repricing cash flows. This is why banks need to consider behaviouralisation due to changing economic conditions to improve on the reliability of the repricing estimates.

Managing and reporting on various commitments involves estimating potential future exposures and their sensitivity to interest rate movements. Banks must ensure they have robust systems to track and appropriately model the cash flows derived from these items.

Estimating cash flows from Non-Performing Loans (NPLs) is particularly difficult due to their uncertain recovery rates and timing, affecting the accuracy of IRRBB reporting. This is why banks use advanced analytics and historical data trends to better predict the behaviour of NPLs and their expected collection periods.

Incorporating commercial margins into IRRBB calculations is challenging, as it requires distinguishing between pure interest rate risk and the margins earned from lending and deposit-taking activities. Institutions should use a transparent methodology for identifying the risk-free interest rate at the inception of each instrument, and apply this methodology consistently across all interest rate-sensitive instruments and business units. Furthermore, the EBA IRRBB guidelines require that banks project the commercial margin for repricing instruments which mature within the NII time horizon.

IRRBB considerations beyond the regulatory reporting

Banks will need to have a robust governance arrangement, which should contain a clear organisational structure with well-defined, transparent and consistent lines of responsibility, including effective processes to identify, manage, monitor and report the IRRBB per their business model, as well as establish adequate internal control mechanisms and validations.

Banks will need to have effective internal reporting systems to provide timely, accurate and comprehensive information about their IRRBB exposures. These reports should be tailored to the respective audiences (governance bodies, executives, managers, specialists) in terms of granularity of the information content, while at the same time being in line with the established governance structure.

Banks should undertake rigorous IRRBB stress tests to identify the potential consequences of severe changes in market conditions on their capital or net interest income measures plus market value changes. The stress tests should correspond with the bank’s nature, size, complexity, business activities and overall risk profile. Furthermore, IRRBB stress testing should be performed regularly (at least annually), and these should be integrated into the banks’ overall stress-testing framework.

Banks should perform reverse stress tests to identify interest rate scenarios that could reveal vulnerabilities as a result of their current IRRBB profile, and at the same time severely threaten their capital, economic value and net interest income plus market value changes.

This short read makes use of several primary references for regulatory returns, which are the EBA Guidelines on IRRBB/CSRBB and the EBA Regulatory technical standards on a standardised and simplified standardised approach.