Skip to the main content.
Featured Image
BLOG. 5 min read

Guiding Banks Through IRRBB Reporting and Financial Regulations

This article is co-written by Anh Chu, Product Director, Head of Risk, AI and Content; and Stefan Trummer, Senior Product Manager from Regnology; and Steven Good, Director, ALM & Liquidity Risk, Product Management from SS&C Algorithmics.

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 the 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.

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 margin's 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 modeling 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 IRRBB 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, the partnership between SS&C Algorithmics and Regnology offers streamlined solutions covering various aspects of IRRBB calculation and regulatory reporting, from data management to XBRL submission.

To learn more about the recent revisions in the EBA’s IRRBB regulations and their importance, join our partnered webinar with Regnology on April 24: "Exploring the Evolving Management on Regulatory Compliance: IRRBB, Basel IV and Beyond"

Related articles

10 Reasons to Integrate Financial Risk and Performance Reporting
BLOGS. December 21, 2023

10 Reasons to Integrate Financial Risk and Performance Reporting

Read more
The Open Protocol’s New Crypto and ESG Requirements: Are You Ready?
BLOGS. February 18, 2022

The Open Protocol’s New Crypto and ESG Requirements: Are You Ready?

Read more
Navigating the EBA’s New IRRBB Reporting Templates
BLOGS. March 26, 2024

Navigating the EBA’s New IRRBB Reporting Templates

Read more