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The management of interest rate risk in the banking book (IRRBB) is under scrutiny at many banks due to the historically low interest rate environment and the increased regulatory requirements. Supervisors have increasingly made interest rate risk the subject of national and European data queries. Many banks are using the implementation of regulatory requirements, especially those of the Basel Committee (BCBS 368) of April 2016 and the EBA, as an opportunity to improve the economic interest rate risk management internally. While the proposal for mandatory capital backing according to standardised approaches in Pillar 1 was discarded, current regulatory proposals in CRD V aim to improve management in Pillar 2.

An improvement enables the banks to comprehensively consider and appropriately manage the IRRBB as well as to implement a risk-adequate pricing of the customer business in terms of the market interest rate method. The expansion of the management approach for IRRBB is particularly necessary to take into account the challenges of the current economic situation. These include, for example:

  • Possible fluctuations in the short-term periodic interest result with simultaneous stabilisation of the present value of the banking book, which counteract the achievement of business objectives
  • The possibility of a progressive squeeze on business margins through the restricted passing on of negative interest rates to the customer. The widespread use of the market interest rate method (internal view) does not take this aspect into account.
  • The change in customer behaviour (interest rate sensitivity), for example, in the exercise of repayment rights or savings behaviour, especially in a rising interest rate environment with a simultaneously changing competitive environment with new market participants

A complete and comprehensive IRRBB management thus includes a risk assessment from the present value and periodic perspective, taking into account all risk components (incl. margin risk) in various interest rate scenarios, which are also prescribed by regulations. The periodic perspective here requires a simulation of new business from different perspectives, for example, taking into account business planning. Models should reflect customer behaviour dynamically, if possible. Changes in customer behaviour should be integrated into IRRBB management through clear governance, including a validation concept as well as the consideration of model risks. In addition to the requirements for internal IRRBB management, the SREP also imposes capital requirements for IRRBB (Pillar 2), which banks should consider in their IRRBB management.

KPMG offers a comprehensive range of services that have been tested in practice

KPMG has broad benchmark know-how and profound professional expertise from a large number of successfully completed preliminary studies and implementation projects. As a result, KPMG has established itself as the market leader in the field of IRRBB for medium-sized and large German banks. Our successful project approach consists of a combination of tailor-made, established and successfully tested solutions for the client.

We support our clients with a customised range of services and offer them the following project approaches, among others:

  • Gap analysis and development of a target vision in the area of periodic (NII) risk. KPMG provides support in the preparation of a gap analysis, as well as in the creation of a step-by-step plan to improve the NII risk measurement, particularly through a methodical conception and the formulation of a target vision for the IT infrastructure.
  • IRRBB concept study for the present value (EVE) and periodic (NII) perspective. KPMG provides support in meeting the EBA and BCBS requirements by preparing a gap analysis. Together with our clients, we develop a catalogue of measures and a target vision that efficiently designs and transparently maps the methodology, responsibilities, processes and IT infrastructure.
  • Implementation of an IRRBB framework. KPMG assists in fully implementing an IRRBB management approach. This comprises a dual view of periodic (NII) and present value (EVE) risks, including flexible simulation and reporting capabilities. Through our market knowledge of existing vendor solutions, we support make-or-buy decisions in order to build a customised IT architecture.