4.4 Non-satisfactory IRRBB internal systems

Paragraph 3 of Article 84 of Directive 2013/36/EU empowers competent authorities to require an institution to use the standardised methodology referred to in paragraph 1 of Article 84 CRD “ where the internal systems implemented by that institution for the purpose of evaluating the risks referred to in that paragraph are not satisfactory ”.

As a minimum, satisfactory internal systems should be implemented in compliance with these Guidelines, taking into account the principle of proportionality.

More specifically, internal systems should be considered as not satisfactory in the following cases at least:

• (a) An IMS should be considered non-satisfactory for the purposes of paragraph 3 of Article 84 CRD if competent authorities assess, on a case by case basis, that the implemented methods do not cover all the material components of the interest rate risk (gap risk, basis risk, option risk), and/or measures do not capture in a robust manner all material dimensions of risks for significant assets, liabilities and off-balance sheet type instruments (e.g., NMD, loans, options ) of the bank’s non -trading book.

Annex I describes a non-restrictive list of methods for IRRBB measurement with an indication of their limitations.

When measuring their exposure to IRRBB, institutions should not limit themselves to the methods listed in Annex I in order to ensure that material aspects of interest rate risk are captured adequately.

• (b) IMS should be considered as non-satisfactory if they are not calibrated, back-tested and reviewed in all their relevant parameters on an appropriate frequency and supported by a due governance and documentation that considers the nature, scale and complexity of the IRRBB inherent in the business model and the institution's activities.

Institutions should duly comply with para. 71 to 79 of these Guidelines in particular with review and validation (at their appropriate frequency, including back testing), governance, risk policies as well as controls.