47. The policies should be well reasoned, robust and documented and should address all IRRBB …

The policies should be well reasoned, robust and documented and should address all IRRBB components that are important to the institution’s individual circumstances. Without prejudice to the proportionality principle, the IRRBB policies should include the following:

• (a) The application of the boundary between ‘non - trading book’ and ‘trading book’. Internal risk transfers between the banking book and the trading book should be properly documented and monitored within the broader monitoring of the IRRBB originated by interest rate derivatives instruments.
• (b) The more detailed definition of economic value and its consistency with the method used to value assets and liabilities (e.g., based on the discounted value of future cash flows, and on the discounted value of future net interest income) adopted for internal use.
• (c) The more detailed definition of net interest income measures plus market value changes and its consistency with the instit ution’s approach to developing financial plans and financial forecasts adopted for internal use.
• (d) The size and the form of the different interest rate shocks to be used for internal IRRBB calculations.
• (e) The use of conditional or unconditional cash flow modelling approaches.
• (f) The treatment of ‘pipeline transactions’¹³ (including any related hedging).
• (g) The aggregation of multicurrency interest rate exposures.
• (h) The measurement and management of basis risk resulting from different interest rate indexes.
• (i) Whether or not non-interest-bearing assets and liabilities of the non-trading book (including capital and reserves) are included in calculations measuring IRRBB for the ICAAP.
• (j) The behavioural treatment of current and savings accounts (i.e., the maturity assumed for liabilities with short contractual maturity but long behavioural maturity).
• (k) The measurement of IRRBB arising from behavioural and automatic options in assets or liabilities, including convexity effects and non-linear payoff profiles.
• (l) The degree of granularity employed in measurement calculations (e.g., use of time buckets).
• (m) The internal definition of commercial margins and adequate methodology for internal treatment of commercial margins.

¹³ Pipeline exposures (e.g., where a loan has been agreed and the customer can choose whether to draw down or not) effectively provide the customer with an option that will most likely be exercised when market conditions least suit the institution (negative convexity). Management of pipeline exposures relies on accurate data on applications received, and modelling of expected drawdowns.

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

• EBA - Published by the European Banking Authority at https://www.eba.europa.eu/