Recalibration of IRRBB interest rate shocks – new developments

Background

In April 2016, the Basel Committee published a comprehensively revised version of its IRRBB guidelines.¹ This document contained the definition and calibration of six currency-dependent interest rate shock scenarios for the first time.

These standardized scenarios, which were defined by the supervisory authority, cover both parallel shifts and twists in the yield curve for the 21 most important currencies worldwide. In the following years, numerous regulatory authorities around the world incorporated these scenarios into the requirements for measuring interest rate risk in the banking book (IRRBB), including the European Banking Authority (EBA) and all national supervisory authorities in the EU. In 2018, the EBA expanded the Basel requirements to include parameters for seven additional European currencies.

With the new IRRBB reporting system, they must submit the results of the risk simulations for all six scenarios in the economic perspective² and for the two parallel scenarios in the earnings-oriented perspective³ to the supervisory authority on a quarterly basis.

For the first recalibration of the IRRBB scenarios, the Basel Committee published a final paper on July 16, 2024 – after a short consultation phase – in which an adjusted method for calculating the parameters for the interest rate scenarios is proposed. You can read about the key aspects of the recalibration in the article “Recalibration of IRRBB interest rate shocks – BCBS has published the final paper”.

Extension of the tool for calculating IRRBB interest rate scenarios

msg for banking has been offering an Excel-based tool for free download since 2017, which users can use to calculate the six currency-dependent IRRBB interest rate scenarios specified by the Basel Committee, the EBA and the national supervisory authorities for standardized interest rate risk calculations.

In addition to the 21 currencies originally specified by the Basel Committee, the tool also supports the seven additional European currencies whose parameters were published by the EBA in 2018. It is also able to calculate user-specific interest rate scenarios in accordance with the formulas specified by the supervisory authorities. The tool can also calculate the new recalibrated IRRBB interest rate scenarios published by the Basel Committee on July 16, 2024.

New features

Over the years, the useful tool has been further developed and is now “ORRP-ready”. This required a small modification so that the interest rate scenario import is not only possible under the THINC software solution as before, but also under the new platform msg.ORRP (Open Risk and Reporting Platform).

This platform offers a modern solution for measuring, analyzing and reporting financial risks in accordance with regulatory requirements. The update of the tool for calculating IRRBB interest rate scenarios ensures that interest rate shocks – including the new, recalibrated ones – can be integrated directly into the ORRP platform. This means that the effects of the recalibration on interest rate risks can already be simulated.

At the request of users, the 9-month and 18-month grid points have been added to the first worksheet in the statement of results. These grid points can only be found in the first worksheet, but not in the interest rate scenario import file.