+Annex II – Sophistication matrix for IRRBB measurement

Annex II – Sophistication matrix for IRRBB measurement

Institutions should apply at least the level of sophistication in their risk measures shown in the table below corresponding to their categorisation under the SREP Guidelines. Where the complexity or scope of an institution’s business model is significant, the institution should, notwithstanding its size, apply and implement risk measures that correspond to its specific business model and adequately capture all sensitivities. All material sensitivities to the interest rate changes should be adequately captured, including sensitivity to behavioural assumptions.

Institutions that offer financial products containing embedded optionalities should use measurement systems that can adequately capture the dependence of options to interest rate changes. Institutions with products that provide behavioural optionalities to clients should use adequate conditional cash flow modelling approaches to quantify IRRBB with regard to the changes in client behaviour that could occur under different interest rate stress scenarios.

The four categories referred to in the sophistication table below reflect the categorisation of institutions laid down in the EBA SREP Guidelines. The different categories reflect different size,

structure and the nature, scope and complexity corresponding to the most sophisticated institutions.of activities of Indicative supervisory expectationsinstitutions; with Category regarding IRRBB1 metric and modellingdepending
IRRBB metric and modellingon the institution’s sophisticationcategory
Cash flow modelling MetricCategory 4 institutionCategory 3 institutionCategory 2 institutionCategory 1 institution
Unconditional cash Net Interest Income-flows (it is assumed based: that the timing of cash Gap analysis: flows is independent of • Repricing gap the specific interest rate scenario)Time buckets advised in the Banking Supervision’s Standards Management and Supervision in the banking book’ Standards.Basel Committee on ‘Principles for the of Interest Rate Risk from April 2016 BCBS Time buckets advised in BCBS Standards,[Gap based on evolving size banking book due to business interest rate environments. commercial margins consistent scenario (see section 4.3 IRRBB).] [Partial duration computed perand composition of the responses to differing Including projected with the interest rate on measurement of [Partial duration computed per transaction and time
Economic value: Duration analysis:Time buckets advised in BCBS Standards.application of partial duration weights. Application of standardinstrument type and time bucket. Application of standard and otherbucket. Application of standard and other
• Modified duration/PV01 of equity • Partial modified duration/partial PV01Application of standard shocks. Yield curve model with tenors corresponding to the time buckets. Indicative supervisory expectationsshocks and other interest rate shock and stress scenarios ( see section 4.3 on measurement of IRRBB ). Yield curve model with tenors corresponding to the time buckets. regarding IRRBBinterest rate shock and stress scenarios (see section 4.3 on measurement of IRRBB). Yield curve model with tenors corresponding to the time buckets .] metric and modellinginterest rate shock and stress scenarios (see section 4.3 on measurement of IRRBB). Yield curve model with tenors corresponding to the time buckets. ] depending
IRRBB metric and modellingon the institution’s sophisticationcategory
Cash flows partially or Net Interest Income-fully conditional on based: interest rate scenario • Net interest income (NII) ( timing of cash flows of options, of instruments with embedded, explicit options and – in more sophisticated approaches – of instruments of which the maturity depends on clients’ behaviour, is modelled conditional on the interest rate scenario)Standard shocks applied to earnings under a constant balance sheet. Based on time buckets advised in the BCBS Standards. Indicative supervisory expectationsStandard and other interest rate shock and stress scenarios for the yield curve ( see section 4.3 on measurement of IRRBB ) applied to earnings, reflecting constant balance sheet or simple assumptions about future business development. regarding IRRBBStandard and other interest rate shock and stress scenarios for the yield curve and between key market rates separately ( see section 4.3 on measurement of IRRBB ) applied to earnings projected by business plan or constant balance sheet. Including projected commercial margins consistent with the interest rate scenario ( see section 4.3 on measurement of IRRBB ). metric and modellingComprehensive interest rate and stress scenarios, combining shifts of yield curves with changes in basis and credit spreads, as well as changes in customer behaviour, are applied to reforecast business volumes and earnings to measure the difference compared with the underlying business plan. Including projected commercial margins consistent with the interest rate scenario ( see section 4.3 on measurement of IRRBB ). depending
IRRBB metric and modellingon the institution’s sophisticationcategory
Economic value: • Economic value of equity (EVE)Application of standard and and stress scenarios for section 4.3 on measurement buckets as advised in the BCBS tenors corresponding to theother interest rate shock the yield curve ( see of IRRBB ), using time Standards; yield curve time buckets.Measure computed on transaction or cash flow basis. Application of standard and other interest rate shock and stress scenarios for the yield curve and between key market rates separately ( see section 4.3 on measurement of IRRBB ). Adequate tenors in yield curves. Full optionality valuation.Comprehensive interest rate and stress scenarios, combining shifts of yield curves with changes in basis and credit spreads, as well as changes in customer behaviour. Adequate tenors in all yield curves. Full optionality valuation. Scenario analysis complemented by Monte Carlo or historical simulations on portfolios with material optionality. Daily updating of risk factors.

1. Overview

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1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

Requirements

3. Related Standards

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