What is IRRBB and how do regulators measure it?

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AcadiFi · Accepted Answer

Interest rate risk in the banking book (IRRBB) measures the sensitivity of a bank's non-trading balance sheet to interest rate movements. The Basel Committee's 2016 standard requires banks to report two complementary views: economic value of equity (EVE), a present-value measure capturing the long-run impact on capital, and net interest income (NII), a 12-month earnings measure. Six standardized scenarios are applied: parallel up, parallel down, steepener, flattener, short-rate up, and short-rate down. The shock magnitude varies by currency — 200 bp parallel for USD, 100 bp for JPY, etc. — and is tested against a supervisory outlier threshold equal to 15% of Tier 1 capital. Breaches trigger Pillar 2 capital add-ons or remediation plans. IRRBB reporting requires banks to decompose exposures into three sub-risks: gap risk from repricing mismatches, basis risk from imperfect correlation between different rate indices, and option risk from prepayments, early withdrawals, and embedded caps/floors. ```mermaid flowchart TD I[IRRBB] --> E[EVE
long-run capital] I --> N[NII
12-month earnings] I --> G[Gap risk] I --> B[Basis risk] I --> O[Option risk] ``` Key modeling judgments include behavioral assumptions for non-maturity deposits (what share is stable core?), prepayment curves on mortgages, and the discount curve for EVE. IRRBB disclosures under Pillar 3 include quantitative tables and qualitative descriptions of assumptions.

What is IRRBB and how do regulators measure it?

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