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