Interest Rate Risk in the Banking Book: 2017 Deloitte Survey | Financial Risk | Deloitte

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Interest Rate Risk in the Banking Book: 2017 Deloitte Survey

Taking a closer look to the BCBS Standards

In April 2016, the Basel Committee on Banking Supervision (BCBS) issued Final Standards for IRRBB that replace the 2004 Principles for the management and supervision of interest rate risk. The new standards set out the Committee’s expectations on the management of IRRBB in terms of identification, measurement, monitoring, control and supervision. The updated IRRBB Principles reflect changes in market and supervisory practices due to the current exceptionally low interest rates and provide methods and models to be used by banks in a wider and enhanced risk management framework.

In light of the significant changes introduced by the Basel Committee standards on IRRBB, Deloitte EMEA invited European and South African banks to participate in an online survey in order to check the readiness of firms to manage the new context of interest rates and evolve their IRRBB practice, moving towards an enhanced framework of interest rates risk governance, models and systems.

The survey, which was undertaken between September and December 2016 across 9 European countries and in South Africa, involved 37 leading banking groups of different sizes(with balance sheetsranging from € 30bn to €500bn) and types (retail, cooperative, private, investment, commercial and universal banks). The survey focused on the assessment of the banks’ current state practices against the new IRRBB framework provided by the BCBS with six detailed sections and more than 80 specific questions on ALM and IRRBB practices.

IRRBB 2017 Deloitte Survey

The survey results highlight very interesting and relevant insights related to different topics:

Dynamic Analysis & Stress Scenarios for Models and Methods are among the top priorities
Dynamic balance sheet projections and stress test scenarios required by the new IRRBB framework are a very relevant topic to be addressed and enhanced by banks within their methodological framework. 51% of the participating banks stated that the introduction of a dynamic approach on NII and EVE sensitivity analysis will have a significant impact on their structure, while only 5% of banks said that they will not adopt a dynamic approach. Banks confirmed that IRRBB management with a dynamic perspective will require a greater cooperation among Risk Management, ALM and Planning & Forecasting departments on both the definition of a coherent operating model and the implementation of an IT integrated solution.

A move towards heightened scrutiny of behavioural models and of IRRBB Indicators
Behavioural models (e.g. non-maturing deposits, prepayment models, renegotiations) and their integration with IRRBB indicators and with the related framework are expected to significantly evolve both on the methodological and modelling side and on the related internal validation approach. For 60% of banks only, the risk department is already actively involved in all the validation tasks related to the IRRBB framework. Moreover, some enhancements are expected in the risk management validation process with particular focus on behavioural models (67,1%) and the definition and calibration of IRRBB indicators used in the monitoring process (61,3%).

A significant number of banks will implement the standardized framework
Even though it is not strictly required by the BCBS standards on IRRBB, a significant part of the participating banks (38%) will implement the standardized approach proposed by the Regulator. For a large part of them, the standardized framework will be adopted with a view of benchmarking their internal models for IRRBB. According to a large majority of banks planning to implement the standardized framework for that purpose (71%), the standardized approach is seen as an opportunity to better explain the outcomes of their internal models to their supervisors and also to anticipate potential future changes of the IRRBB requirements.

Increasing needs for more integration & synergies on systems
The majority of participating banks highlighted the importance of integrating their IRRBB systems into a unique platform able to manage and use input data both from other risk areas (e.g. combined stressed scenarios) and planning & control department (e.g. forecasts and projections for dynamic simulation).

Get ready for much more reporting
The Pillar 3 disclosure requirements provided in the new BCBS standards on IRRBB will require banks to enhance their reporting framework with more granular views. Under the current Pillar 3 framework, a large majority of the participating banks (72%) already provide quantitative and qualitative disclosures on their IRRBB on annual, semi-annual or quarterly basis but, with the new BCBS standards, the amount of quantitative and qualitative disclosures is expected to significantly increase.

More information?

Want to know more on ALM & IRRBB Management solutions? Please contact Roald Waaijer or Eelco Schnelzer via their contact details below.

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