The recent changes to Interest Rate Risk in the Banking Book (IRRBB) have far-reaching implications for the entire regulatory reporting landscape that extend beyond the mere addition of new reporting templates. It's crucial for banks to comprehend the intricate connections and interdependencies between IRRBB reporting requirements and other regulatory domains, particularly financial information reporting (FINREP) standards. Ignoring these connections could lead to inconsistencies and validation errors, affecting the accuracy of submitted reports.

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.

These examples emphasize that IRRBB reporting cannot be undertaken in isolation; rather, it is intertwined with various other regulatory frameworks. Consequently, banks must employ sophisticated software and data management solutions capable of managing these dependencies. This entails integrating the results of regulatory reporting processes into IRRBB processing and accounting for sequential dependencies in batch chains.  

IRRBB reporting cannot be undertaken in isolation; rather, it is intertwined with various other regulatory frameworks. [...] Banks must employ sophisticated software and data management solutions capable of managing these dependencies.

IRRBB – Impact on the regulatory reporting landscape

Updates to calculation methodologies 

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.  

Complying with these changes will pose challenges, some of which may require financial institutions to make major adjustments to their existing systems and processes.

IRRBB – Impact on the regulatory reporting landscape

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. 

Compliance challenges and solutions 

Complying with these changes will pose challenges, some of which may require financial institutions to make major adjustments to their existing systems and processes – particularly where banks currently have outdated or limited IRRBB and/or regulatory reporting frameworks. As the September deadline approaches, banks should act swiftly to ensure adherence to the new calculation and reporting requirements. Discussions on how technology solutions can address these challenges and enhance regulatory compliance are encouraged.

To assist banks in navigating these challenges, partnerships like the one between SS&C Algorithmics and Regnology offer streamlined solutions covering various aspects of IRRBB calculation and regulatory reporting, from data management to XBRL submission. 

This article is co-written by Regnology and SS&C Algorithmics.

Authors

Steven Good

Steven Good

Director, ALM & Liquidity Risk, Product Management SS&C Algorithmics

Anh Chu

Anh Chu

Product Director Regnology

Stefan Trummer

Stefan Trummer

Senior Product Manager Regnology

Das könnte Sie auch interessieren

  • Basel IV: Adapting to the new data requirements

    Insight

    Basel IV: Adapting to the new data requirements

    Regnology’s Product Director Anh Chu shares her perspectives on different areas of challenges introduced by Basel IV and best practices for a smooth transition to the new regulatory framework.

    Weiterlesen
  • In conversation with Rabobank

    Insight

    In conversation with Rabobank

    Rabobank's Shirin Kroes (Product Owner, Sustainability Reporting) and Rishabh Kapoor (Senior Business Analyst, External Reporting) discuss Regnology’s pivotal role in their bank’s ESG reporting journey.

    Weiterlesen
  • IReF implementation: Exploring challenges and solutions

    Insight

    IReF implementation: Exploring challenges and solutions

    Explore key challenges and solutions in implementing IReF.

    Weiterlesen

Kontakt