This article is co-written by Anh Chu, Product Director, Head of Risk, AI and Content & Stefan Trummer, Senior Product Manager from Regnology and Steven Good, Director, ALM & Liquidity Risk, Product Management from SS&C Algorithmics.
The downfall of Silicon Valley Bank in spring 2023 was triggered by poor management of interest rate risk in the face of rising rates. This risk category is one of the most significant that banks must manage. Therefore, it came as no surprise when the European Banking Authority (EBA) announced new reporting requirements for the Interest Rate Risk in the Banking Book (IRRBB) on July 31, 2023, aiming to prevent similar bank failures due to future interest rate fluctuations.
The EBA then published updates to the Implementing Technical Standards (ITS) on supervisory reporting of IRRBB, including new reporting templates as part of the Data Point Model 3.3 (DPM 3.3) framework. Single Supervisory Mechanism (SSM) banks were mandated to comply with these changes by December 2023.
Subsequently, on February 6, 2024, the EBA unveiled Reporting Framework 3.4 (DPM 3.4), finalizing the taxonomy to encompass IRRBB. Starting in September 2024, nearly all banks in the EU will be required to adhere to these new reporting requirements. While IRRBB is not a new regulation, the volume and complexity of EBA reporting requirements surpass those of current local mandates, posing a challenge for many banks.
For instance, while even small and non-complex institutions (SNCIs) must submit over 4,000 quantitative and qualitative data points as per the ITS, non-SNCIs will need to submit approximately 6,000 data points to national regulators.
ITS on supervisory reporting
The ITS on supervisory reporting is the latest in a series of fundamental changes the EBA is making to the IRRBB framework. Beginning in 2022, the regulator implemented the Capital Requirements Directive (CRD V), which includes:
- Guidelines on IRRBB and credit spread risk arising from non-trading book activities (CSRBB)
- The final draft Regulatory Technical Standards (RTS) on the IRRBB standardized approach
- The final draft RTS on IRRBB supervisory outlier tests (SOT)
These changes aim to enhance methodologies and standardize the IRRBB framework, compelling banks to adopt best practices and impose limits on how certain instruments—such as prepayments, term deposit early withdrawals, loan commitment drawdowns and non-maturity deposits—are modeled.
With the addition of the new IRRBB template changes, banks are now required to deliver structured reports on these risks, promoting uniform reporting across Europe and bringing about a more resilient and standardized risk management framework.
It is important to acknowledge the scope of these requirements for compliance teams, applicable to large banks, SNCIs and other financial institutions alike. Although SNCIs and other institutions may submit simplified templates, the underlying calculation and required information remain substantially complex.
In completing these templates, banks must provide data on net interest income (NII) risk, economic value of equity (EVE) risk and repricing gap measures, alongside other metrics (such as duration and yields), category breakdowns and methodologies. Banks must map the data accurately, calculate relevant analytics, incorporate appropriate validation rules and submit the reports in eXtensible Business Reporting Language (XBRL) format.
The road ahead
Complex as the regulations are, the solutions needed for efficient reporting are relatively intuitive. Financial institutions need streamlined workflows throughout the reporting lifecycle, from foundational management and storage of the data to normalization and calculation to format-specific report submission. Partnerships like the one between SS&C Algorithmics and Regnology, focused on IRRBB calculation and reporting, offer one possible solution.
The September deadline is fast approaching, so there’s not a moment to waste. The time for banks to accelerate their reporting is now—otherwise, they’ll be scrambling to catch up. By embracing modernization today, these firms can ensure a smooth transition to the new scope of IRRBB compliance while preparing for the future of regulation.
To learn more about the joint solution, contact us.
