How does the IRRBB standardized framework measure interest rate risk in the banking book, and what are the key metrics?

The Interest Rate Risk in the Banking Book (IRRBB) framework addresses the risk that changing interest rates affect the economic value and earnings of a bank's non-trading positions. Unlike market risk (Pillar 1 capital), IRRBB is primarily a Pillar 2 (supervisory review) measure, though some jurisdictions are moving toward standardized capital charges.\n\nTwo Key Metrics:\n\n1. Delta EVE (Economic Value of Equity): The change in the present value of all banking book assets minus liabilities under interest rate shocks. Captures long-term value risk.\n\n2. Delta NII (Net Interest Income): The change in projected interest income minus interest expense over a 1-year horizon under rate shocks. Captures short-term earnings risk.\n\nSix Prescribed Shock Scenarios:\n\n`mermaid\ngraph TD\n A[\"IRRBB Shock Scenarios\"] --> B[\"Parallel Up
+200-300 bps across all tenors\"]\n A --> C[\"Parallel Down
-200-300 bps across all tenors\"]\n A --> D[\"Steepener
Short rates down, long rates up\"]\n A --> E[\"Flattener
Short rates up, long rates down\"]\n A --> F[\"Short Rate Up
Short end rises, long end minimal\"]\n A --> G[\"Short Rate Down
Short end falls, long end minimal\"]\n`\n\nThe shock magnitudes vary by currency. For USD, the parallel shock is approximately 200 bps, with larger shocks for short tenors in the twist scenarios.\n\nWorked Example:\nParkland Community Bank has the following simplified banking book:\n\n| Position | Notional | Repricing Tenor | Rate |\n|---|---|---|---|\n| Fixed-rate mortgages | $800M | 7 years (avg) | 5.25% |\n| Auto loans | $200M | 3 years (avg) | 7.10% |\n| Savings deposits | $600M | Behavioral: 2 years | 3.50% |\n| CDs | $250M | 1 year | 4.80% |\n| Wholesale funding | $150M | 6 months | 5.20% |\n\nDelta EVE under Parallel +200 bps:\n\nAsset PV change:\n- Mortgages: -$800M x Modified Duration(7Y) x 0.02 = -$800M x 5.8 x 0.02 = -$92.8M\n- Auto loans: -$200M x 2.6 x 0.02 = -$10.4M\n\nLiability PV change:\n- Savings: +$600M x 1.7 x 0.02 = +$20.4M (liability PV falls = equity gain)\n- CDs: +$250M x 0.9 x 0.02 = +$4.5M\n- Wholesale: +$150M x 0.45 x 0.02 = +$1.35M\n\nDelta EVE = (-92.8 - 10.4) + (20.4 + 4.5 + 1.35) = -$76.95 million\n\nAs a percentage of Tier 1 capital ($120M): -64.1%\n\nSupervisory Outlier Test:\nA bank is flagged as an outlier if the worst-case delta EVE across the six scenarios exceeds 15% of Tier 1 capital. Parkland's -64.1% is far above the threshold, triggering supervisory intervention (required to reduce duration mismatch or add hedges).\n\nDelta NII Impact:\nUnder parallel +200 bps over 1 year, floating-rate funding reprices higher immediately while fixed-rate assets reprice slowly. This squeezes NII in the short term even though EVE eventually benefits from higher reinvestment rates.\n\nStudy IRRBB in our FRM Part II materials.