The management of interest-rate risk in the banking book (IRRBB) has been increasing in importance since 2004, shown by the increased frequency and scale of regulatory requirements. With its “Principles for the management and supervision of interest rate risk” (BCBS 108), the Basel Committee on Banking Supervision (BCBS) addressed interest-rate risks arising from non-trading transactions at both credit institutions and investment firms. The revised guidelines (BCBS 368) were published in April 2016 and corresponding EU requirements have been regularly revised and expanded.

In July 2018, the European Banking Authority (EBA) published its latest, revised guidelines (GL) on the management of IRRBB (EBA/GL/2018/02), which, together with the revisions to the Capital Requirements Regulation & Directive (CRR/CRD) and the resulting EBA mandates for technical standards, should implement the latest BCBS standards. The EBA GL form part of a larger review of Pillar-2 measures, which include revisions to GL on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/GL/2018/03) and to GL on institutions’ stress testing (EBA/GL/2018/04). The EBA sets out the supervisory authorities' expectations of the IRRBB's measurement, management and governance arrangements and its consideration in the internal capital adequacy assessment process (ICAAP).

In addition to reflecting the developments of the BCBS standards, the revised GL clarify the requirements for internal control and the regulatory outlier tests. New definitions have been included in the GL as well as detailed requirements for the allocation of capital for IRRBB to provide for unfavourable developments in the economic value of equity (EVE) and net interest income (NII). In addition, supervisors must be informed, as an "early warning signal", if the decline in EVE exceeds 15% of core capital. There are new rules for an appropriate assessment of the interest-rate risk of new products in the banking book (e.g. interest-rate derivatives), provisions on currency-specific shocks for material currencies, an explicit provision for institutions to consider negative interest rates in low interest-rate environments and the integration of six shock scenarios for the outlier test proposed by the BCBS. In addition, credit-spread risk in the banking book (CSRBB) must now be identified, measured, monitored, and controlled.

The EBA IRRBB guidelines replace the previous EBA guidelines published in May 2015 (EBA/GL/2015/08) and apply from 30 June 2019 with transitional provisions until 31 December 2019. Once the translations have been published, competent authorities have two months to confirm their plans to adopt the new guidelines or explain clearly why they do not plan to comply. The short-term nature of the implementation makes it clear how important the new GL are for supervision.

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) only recently implemented the previous EBA/GL/2015/08 with Circular 09/2018, which included the abolition of the "alternative procedure” and required banks to measure and report interest-rate risk from both an economic-value and an earnings perspective. With the recently published Circular 06/2019, which applies from 31 December 2019, the BaFin has repealed the old circular and introduced further components of the EBA Guidelines, for example, additional interest-rate scenarios, an interest-rate floor below zero, and the consideration of additional positions.

As part of the risk functionality in Abacus360 Banking, Regnology offers modules for the quantification of IRRBB that are fully integrated into the 360° solution. Abacus360 Banking Risk calculates IRRBB from the EVE perspective, which measures the long-term effect of interest-rate changes, and from the NII perspective, which measures the periodic net interest income.

The modules can calculate the major interest-rate risks: option risk, repricing risk, yield-curve risk, basis risk and credit spread risk.

  • Repricing risk is generated in times of rising or falling interest rates, where the rates for liabilities increase or decrease before the rates on receivables.
  • Yield-curve risk is caused by non-parallel shifts (slope and shape) of the yield curve and thus affects the valuation of all interest-bearing financial instruments.
  • Option risk occurs through potentially adverse price changes in explicit options or financial instruments with embedded options resulting from an interest-rate change. Particular attention is given to options whose exercise depends on behaviour, e.g., by BGB 489 or other special repayment rights.
  • Basis risk arises from the valuation of financial instruments with several reference curves and comes in three forms. Changes in interest rates are shown in the same tenors with two or more reference curves (reference-rate basis risk), in different tenors of the same reference curve (tenor basis risk/short-term non-parallel gap risk), and in equal tenors of the same reference curve but in a different currency (currency basis risk).
  • The Credit Spread Risk in the Banking Book (CSRBB) is the risk arising from market price changes of credit-risk positions due to the widening of spreads (credit risk, liquidity premium).