Definition
IRRBB (interest rate risk in the banking book) is the current or prospective risk that changes in interest rates affect an institution's capital and earnings through its banking book positions: loans, deposits, investment securities, issuances and hedging derivatives.
It has three components:
- gap risk, from mismatched repricing dates between assets and liabilities;
- basis risk, from reference rates that do not move together;
- option risk, automatic (caps, floors) or behavioural (prepayments, deposit withdrawals).
Measurement
IRRBB is measured through two complementary families of metrics: EVE (economic value of equity) sensitivity and NII (net interest income) sensitivity, under the six supervisory shock scenarios and under internal scenarios. Repricing gaps by maturity bucket, duration and NPV of positions, stress tests and basis risk analyses complete the picture.
Regulatory requirement
The framework rests on the Basel Committee standards (2016), Article 84 of the CRD and the EBA guidelines (EBA/GL/2022/14), supplemented by technical standards on the supervisory outlier test and the standardised approach. IRRBB is a Pillar 2 risk: there is no automatic capital charge, but it is assessed in the SREP and must be covered in the ICAAP. Institutions report their measures in the EBA IRRBB templates.
Practical challenges
- Contract-level data quality and reconciliation with accounting.
- Governance of behavioural models, which drive most of the risk on deposits.
- Producing, on time and at every reporting date, a consistent set of measures, reports and explanations.
In RIALTO
This concept is covered by the IRRBB Insight Core module. The use case 'Explaining a change between two reporting dates' shows it in practice.