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Interest Rate Risk in the Banking Book management, EVE and NII sensitivity analysis, and EBA-aligned regulatory reporting.
Interest Rate Risk in the Banking Book (IRRBB) refers to the current and prospective risk to a bank's capital and earnings arising from adverse movements in interest rates that affect the bank's banking book positions. Unlike trading book market risk, IRRBB exposures are structural driven by the maturity and repricing mismatch between assets, liabilities, and off-balance-sheet items in the retail and commercial banking franchise. IRRBB is governed by BCBS 368 (April 2016) and the EBA Guidelines on the management of interest rate risk arising from non-trading book activities (EBA/GL/2022/14), which became applicable from June 2024.
Two complementary metrics anchor the IRRBB framework. Economic Value of Equity (EVE) measures the change in the present value of the bank's banking book under a prescribed interest rate shock, capturing the long-term impact on economic value. Net Interest Income (NII) measures the change in accrued interest income over a defined horizon (typically one to three years), capturing the shorter-term earnings impact. Both must be reported, as they can move in opposite directions: a flatter curve can improve NII while reducing EVE through duration compression.
IRRBB decomposes into four sub-risks. Repricing risk arises from timing mismatches in rate resets. Basis risk emerges from imperfect correlation between different reference rates (e.g., 3M LIBOR vs. prime). Yield curve risk is the exposure to non-parallel shifts. Optionality risk covers both explicit (caps, floors, prepayment options) and implicit (behavioral) options held by clients a particularly challenging component for retail mortgage books. The EBA framework prescribes six parallel shock scenarios and two yield curve scenarios; BCBS 368 also requires outlier criteria relative to capital and Tier 1.
TQH TERMINAL provides a complete IRRBB engine: contract-level behavioural modelling, automated shock application, EVE and NII calculation under all prescribed scenarios, and outlier ratio computation against Tier 1 capital. The platform supports both supervisory shock scenarios and bespoke internal scenarios for ALM committee reviews. Behavioural models for non-maturity deposits, prepayment optionality, and term deposit decay are configurable and back-tested against historical behaviour.
The output is regulatory reporting templates (COREP IRRBB templates under EU CRR III), management dashboards, and ad-hoc analytics for balance sheet strategy. Integration with the funding desk and treasury function enables IRRBB-aware pricing of internal funds transfer and the assessment of hedging strategies primarily interest rate swaps, swaptions, and bond portfolio rebalancing for their effectiveness against the outlier criteria.