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Banking Rule Book
Text applicable on 7 Oct 2026Consolidated version of 30 Jun 2023In forceUnofficial text · authentic on EBA (PDF) (opens in a new tab)

GL-IRRBB Annex I — as applicable on 7 Oct 2026 (version of 30 Jun 2023)

Annex I

IRRBB measurement methods (non-exhaustive list)

Cash flow Metric Description Risks captured Limitations of metric modelling Gap analysis allocates all relevant interest rate sensitive Net Interest Income- • The metric approximates the instruments into predefined time buckets according to based: gap risk only linearly. their repricing or maturity dates, which are either

  • Gap analysis: • It is based on the assumption contractually fixed or based on behavioural Repricing gap Gap risk (only parallel that all positions within a assumptions. It calculates the net positions (‘gaps’) in

  • Focus on net interest risk) particular time bucket mature or each time bucket. It approximates the change in net income (NII) reprice simultaneously. interest rate income ensuing from a yield curve shift by component: • It fails to measure basis and multiplying each net position with the corresponding Change of NII option risk. interest rate change.

Unconditional

Unconditional cash flows (it is assumed that the timing of cash flows is independent of the specific Economic value: interest rate • Duration analysis: scenario) Modified duration/PV01 of e quity

The modified duration approximates the relative change in the net present value of a financial instrument due to a marginal parallel shift of the yield curve by one percentage point. The modified duration • The metric only applies to of equity measures the exposure of an institution to gap marginal shifts of the yield curve. risk in its non-trading book. PV01 of equity is derived In the presences of convexities, from the modified duration of equity and measures the it may underestimate the effect absolute change of the equity value resulting from a 1 of larger interest rate basis point (0.01%) parallel shift of the yield curve. Gap risk (only parallel movements. risk) The starting point is the allocation of all cash flows of • It only applies to parallel shifts of interest rate sensitive instruments into time buckets. the yield curve. For each instrument type, an appropriate yield curve is • It fails to measure option risk selected. The modified duration of each instrument is and captures basis risk at best calculated from the change of its net present value due partially. to a 1 percentage point parallel shift of the yield curve. The modified duration of equity is determined as the modified duration of assets times assets divided by

51 Cash flow Metric Description Risks captured Limitations of metric modelling equity minus the modified duration of liabilities times liabilities divided by equity. PV01 of equity is obtained by multiplying the modified duration of equity by the value of equity (i.e., assets minus liabilities) and dividing by 10 000 to arrive at the value change per basis point.

• Partial modified duration/partial PV01

The partial modified duration of an instrument for a specific time bucket is calculated as the modified • The metric only applies to duration above, except that not the entire yield curve marginal interest rate changes. is shifted in parallel, but only the yield curve segment In the presence of convexity, the corresponding to the time bucket. These partial Gap risk (parallel and metric may underestimate the measures show the sensitivity of the market value of non-parallel risk) effect of larger interest rate the banking book to a marginal shift of the yield curve movements. in particular maturity segments. To each time bucket’s • It fails to measure the basis and partial measure a different magnitude of a shift can be option risk. applied, such that the effect of a change of the yield curve’s shape can be computed for the entire portfolio.

Cash flows partially or fully conditional on interest rate scenario (it is assumed that Net Interest Income-the timing of based: cash flows of Focus on net interest options, of income (NII) instruments component: with embedded, • Change of NII explicit options and – in more sophisticated approaches – of instruments of

The change of NII is an earnings-based metric and measures the change of the net interest income over a particular time horizon (usually 1-5 years) resulting from a sudden or gradual interest rate movement.

The starting point is the mapping of all cash flows of Gap risk (parallel and interest rate sensitive instruments to (granular) time non-parallel), basis risk buckets (or using the exact repricing dates of individual • Sensitivity of the outcome to the and, provided all cash positions in more sophisticated systems). modelling and behavioural flows are modelled assumptions. The base scenario for the calculations reflects the scenario dependent, also • Complexity. institution’s current corporate plan to project the option risk volume, pricing and repricing dates of future business transactions. The interest rates used to calculate future cash flows in the base scenario are derived from forward rates, appropriate spreads or market expected rates for different instruments.

52 Cash flow Metric Description Risks captured Limitations of metric modelling which the In assessing the possible extent of NII changes, banks maturity use assumptions and models to predict the path of depends on interest rates, the maturing of existing assets, liabilities clients’ and off-balance-sheet items, and their potential behaviour, is replacement. modelled Net interest income-based metrics can be conditional on differentiated according to the sophistication of the interest rate projecting future cash flows: simple run-off models scenario) assume that existing assets and liabilities mature without replacement; constant balance sheet models assume that maturing assets and liabilities are replaced by comparable instruments; while the most complex dynamic cash flow models reflect business responses to differing interest rate environments in the size and composition of the banking book.

All earnings-based metrics can be used in a scenario or stochastic analysis. Earnings at risk (EaR) is an example of the latter, which measures the maximum NII change at a given confidence level.

Economic value: Focus on economic value of equity (EVE) • Change in EVE

• Sensitivity of the outcome to the The change in EVE is the change in the net present value of all cash flows originating from banking book assets, modelling and behavioural liabilities and off-balance-sheet items resulting from a assumptions. Gap risk (parallel and change in interest rates, assuming that all banking book • Stochastic metrics, which apply non-parallel), basis risk positions run off. distributional assumption, may and, if all cash flows are fail to capture tail risks and non-The interest rate risk can be assessed by the ∆EVE for modelled scenario linearities. specific interest rate scenarios or by the distribution of dependent, also option • Full revaluation Monte Carlo ∆EVE using Monte Carlo or historical simulations. risk approaches are computationally Economic value at risk (EVaR) is an example of the demanding and may be difficult latter, which measures the maximum equity value to interpret (‘black-box’). change for a given confidence level. • Complexity.

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