IRRBB – Impact on the regulatory reporting landscape

Here are a few illustrative examples: 

• In templates J 02.00 – J 05.00, accurate allocation of IRRBB figures to defined clusters is imperative. This allocation must align with the exposure classes defined in the FINREP instructions, such as “central bank” and “interbank”.  
• Specific reporting requirements, such as delineating Economic Value of Equity (EVE) and Net Interest Income (NII) sensitivities of non-performing exposures (NPE) in row 0070 of template J 02.00, necessitate adherence to NPE definitions consistent with capital requirements and FINREP guidelines.

• Additionally, definitions from own funds rules, such as those concerning retail and exposures secured by residential real estate, are integral for reporting in rows 0080 and 0090 of template J 02.00.  
• Even the wholesale deposits definition used in IRRBB templates must align with classifications used in Liquidity Coverage Ratio (LCR) calculations.

Recent changes to IRRBB calculations and scenarios, including increased interest rate shock sizes mandated by the European Banking Authority (EBA), pose additional challenges. The introduction of standardized approaches for calculating NII and EVE, alongside the existing Internal Measurement Systems (IMS) approach, necessitates robust systems and processes. 

Moreover, the IRRBB-SA methodology builds on a standardization first seen in BCBS368 and extends it to NII-SA, whereas the BCBS368 consulted but rejected such an approach. The NII-SA represents a new risk measure that is similar to but divergent from the actual NII that banks report in financial statements.

Fundamentally, it is a gap-based approximation of NII risk, with roots in traditional ALM risk management but also incorporating gap risk, basis risk and option risk. It breaks down into multiple subcomponents, with yield risk, commercial margin, core interest income, option risk and basis risk all being incorporated.

Using the standardized approach, banks must monitor their margins risk-free rate over a rolling 360-day window to price new commercial margins. No margin adjustment through rate environments is included, although it is empirically supported as a market dynamic.  

Another significant change to the calculations is the treatment of Non-Maturity Deposits (NMDs). The most important update here is the treatment of the core amount. In modelling NMDs, banks typically divide balances into core and non-core, with the former representing the stable funding the bank provides. In determining the core amount, the pass-through rate is now explicitly described. In addition, the core is now subject to the scenario multiplier such that the core/non-core mix varies by scenario. These changes apply to both the EVE and NII methodologies. Given the materiality of core balances, the scenario dependency is not without challenges as banks consider the hedging of such risks. 

The Basis Risk add-on for NII also requires banks to look at the historical basis moves between major indices within both widening and tightening scenarios, and then report the most adverse of the two on a currency basis.

Banks must also report an NII market value element for FV instruments with maturities longer than the NII horizon. This requirement has been removed from the final NII-SA itself, but it remains an important part of the EBA IRBBB template. There is also an NII optionality add-on for explicit options that employs a different methodology than the EVE optionality add-on. Whereas the EVE case includes a volatility shock, the NII case does not.