Calculation of the present value-based (EVE) and P&L-based (NII) interest rate risk of the banking book

Background

With the 2018 EBA GLs institutions are obliged to measure their interest rate risks at least quarterly both for the economic and earnings perspective. The guidelines require banks to comply with the new regulation by 30 June 2019 (Category 1 and 2 banks) or 31 December 2019 (Category 3 and 4) The guidelines have already been implemented in national regulations or are under consultation. Abacus360 Risk offers solutions for both perspectives. Abacus360 Risk offers solutions for both perspectives.

Functional scope of the IRRBB Solution

Like all Abacus360 modules the end-to-end IRRBB solution is based on a unified data model and provides processes and methods for effective data management, cash flow computation, scenario management and modeling / parameterization.

Economic Value of Equity (EVE)

For the economic perspective on interest rate risk (EVE), the present value is calculated using various market data scenarios under standard business day conventions, day count conventions and various valuation models. With extensive market data configuration it is possible to precisely determine which market data should be used in the simulation. The solution offers a parallel shift as well as the interest rate scenarios (+/- 200bp and 6 stress scenarios) and currency-specific floors required by the EBA Guidelines. Behavioral options (prepayment and termination rights as well as the utilization of undrawn loan commitments) are taken into account. For an adequate traceability the present value differences per scenario are stored on granular level in the Abacus360 data model.

Earnings Perspective: Net Interest Income (NII)

In addition to the economic perspective, Abacus360 also offers the P&L-oriented (Net Interest Income, NII) quantification of interest rate risks. The NII Solution calculates the interest result in the base scenario as well as under adverse interest rate shocks (see above) for parameterizable forecast horizons and interest rate scenarios. Future cash flows are calculated using the Cashflow Generator, e.g. under the constant balance sheet assumption required by EBA or under dynamic business planning. Interest rate elasticities (pass-through rates) and credit spreads can be configured on product type level when generating new business. Like for EVE it is also possible for NII to consider customer-related behavioral options. Both modules provide a consistent data lineage and traceability. A key aspect of the Abacus360 IRRBB Solution is its consistency with other cash flow-based regulatory requirements, such as: LCR, NSFR or ALMM but also from the economic perspective. Thus, Abacus360 significantly supports banks in meeting the ICAAP and ILAAP requirements for consistency across various risk categories and between Pillar 1 and 2 of the Basel framework.

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