IRRBB Glossary

The risk that changes in market interest rates hurt either your profits (NII) or the underlying value of your balance sheet (EVE). It's the core risk your treasury and ALM teams manage every day.

Your assets and liabilities reprice at different times. If you've lent fixed for 5 years funded by overnight deposits, there's a gap between when your income resets and when your cost of funding resets. That timing mismatch is gap risk.

You've got assets and liabilities that both float, but they're linked to different benchmarks or reprice at different speeds. Your mortgages are on SONIA but your funding is on EURIBOR, or your tracker mortgages reset annually but your swaps reset quarterly. When the spread between these indices moves, you're exposed.

Option risk splits into two broad categories. The first is customer-driven: your customers have choices that cost you money. They can prepay their fixed mortgage early (you lose a high-yielding asset when rates fall), or they can move their deposits to a competitor (you lose cheap funding when rates rise). Some of these options are contractual, most are behavioural.

Deposit beta (pass-through rate) is the assumption that determines how much of a rate move gets passed on to depositors on managed rate products. A beta of 0.5 means if rates rise 100bps, deposit costs rise 50bps — the bank retains the other 50bps as margin.

The value of your bond portfolio can drop not because base rates moved, but because credit spreads widened. Your government bonds might be fine, but your corporate bond and covered bond holdings lose market value when spreads blow out — even if the issuer remains perfectly solvent.

Inflation-linked bonds (linkers) and inflation swaps have principal and/or coupon payments that are indexed to an inflation measure — typically RPI or CPI. As inflation rises, the inflation-adjusted notional increases, which increases the size of coupon payments and the redemption value. A bank holding linkers or receiving the inflation leg of a swap therefore has direct exposure to realised inflation outcomes. If inflation moves unexpectedly and this exposure is unhedged, the value of the position and the cashflows it generates will deviate from what was assumed when the instrument was acquired or structured.

If the Bank of England raises rates by 100bps and your savings rate only goes up by 40bps, your deposit beta is 0.4. The remaining 60bps widens your net interest margin — for now. The beta is never fixed: it reflects a combination of management pricing decisions, competitive dynamics, customer rate sensitivity, and the stage of the rate cycle.

Standard stress testing asks: if rates move by X, what happens to our EVE and NII? Reverse stress testing inverts the question: what combination of rate moves and assumption changes would cause a defined threshold to be breached?

Your cashflow projections change depending on which rate scenario you're running. In a falling rate scenario, mortgage prepayments accelerate (borrowers refinance), so your asset cashflows shorten. In a rising rate scenario, deposits migrate to higher-paying products, so your liability profile shifts. The model reacts to the scenario.

Your cashflow projections are the same regardless of the rate scenario. Prepayment speeds stay constant, deposit volumes don't move, pipeline conversion is fixed. You calculate one set of cashflows and then just discount them under different rate curves.

NMDs and equity are the two principal sources of structural interest rate exposure for most retail banks — both are non-contractual, variable rate funding sources whose earnings are directly affected by rate movements. The structural hedge is specifically designed to reduce this sensitivity by converting a portion of the exposure into a fixed rate income stream over a defined horizon.

Current accounts, instant access savings, transactional accounts — anything your customers can take out tomorrow but in practice mostly don't. They have no contractual end date, so you have to model when they'll actually leave and how they'll reprice.

Loans in default or approaching default. For IRRBB purposes, the question is not simply whether to include them, but how to model them. NPEs are still on the balance sheet and have a notional value, but the cashflows are uncertain and driven by credit recovery dynamics rather than contractual interest rate terms. The borrower is not reliably paying interest, so treating an NPE as an interest-bearing instrument at its contractual rate overstates the rate sensitivity of the asset.

Discount all your future asset and liability cashflows to today's value, then shock the rates and see how much that value changes. It captures the full lifetime impact of a rate move — not just this year's P&L but the present value of every future cashflow.

Take your EV calculation but don't assign any cashflows to equity — equity is the residual that's being measured, not a liability to model. EVE = PV(assets) minus PV(liabilities), where liabilities exclude equity. The change in EVE under rate shocks tells you how much economic value shareholders would lose or gain.

How much does your net interest income (or broader earnings) change if rates move? Unlike EVE which looks at lifetime value, earnings measures focus on a defined horizon — typically 1 to 3 years. This is what your CFO and board care about quarter to quarter.

If rates move against you, how much less NII will you earn over the next 12 or 24 months compared to your base case? It's the earnings equivalent of EVE sensitivity — but focused on near-term profitability rather than lifetime value. When the horizon is fixed at one year, this is often labelled AEaR — a common convention in ICAAP submissions and board risk appetite frameworks.

If a portfolio has a PVBP of £500,000, a one basis point rise in rates reduces its present value by £500,000. A 100bp move would reduce it by approximately £50 million (though convexity means the relationship is not perfectly linear for large moves). PVBP is the standard unit for expressing rate sensitivity — it allows hedgers to size trades precisely: if a mortgage book has a PVBP of £1 million and a swap has a PVBP of £10,000 per £100m notional, you need £10bn of swaps to hedge it.

If a bond portfolio has a CS01 of £200,000, a one basis point widening in credit spreads reduces its market value by £200,000. A 100bp spread widening — typical in a credit stress event — would reduce it by approximately £20 million. CS01 is the primary sensitivity measure for CSRBB, used to size credit spread hedges and set risk appetite limits on bond portfolios, covered bond holdings, and other credit-risky instruments in the banking book.

Every maturity point moves by the same number of basis points — up 200bps, down 100bps, up 300bps. The curve shifts but does not twist or steepen. The six EBA prescribed scenarios include four parallel shocks (parallel up, parallel down, and two short rate shocks that are approximately parallel) alongside two non-parallel scenarios.

Rather than the whole curve shifting uniformly, the curve twists or rotates. A steepener widens the spread between short and long rates; a flattener compresses it. These scenarios reflect the more typical behaviour of yield curves during rate cycles — central bank action moves the short end sharply while the long end moves by a different amount, driven by inflation expectations, term premium, and market dynamics. The EBA prescribes two non-parallel scenarios: a short rate shock up and a short rate shock down, which cause the curve to steepen or flatten respectively.

Assume your bank stops writing new business today. Every loan repays on schedule, every deposit rolls off at maturity, and nothing is replaced. The balance sheet shrinks to zero over time. This is the assumption used for EVE calculation under the SOT.

Model the balance sheet going forward including new lending, new deposits, and product repricing — all adjusted to be consistent with the rate scenario you're running. If rates rise, your model should reflect lower new mortgage volumes and potentially higher deposit pricing.

Instead of assuming your mortgage book stays flat or grows at 3% regardless, you build a relationship: mortgage volumes are a function of the rate level, the spread to SVR, unemployment, and house price growth. When you run a rate shock scenario, the model automatically adjusts new business volumes, deposit mix, and pricing to be consistent with that environment. This is how a truly rate-conditioned dynamic balance sheet is implemented in practice.

When something matures or reprices, you replace it with an identical instrument. Your 2-year fixed mortgage that rolls off gets replaced by another 2-year fixed mortgage at the same spread. The balance sheet size and composition stay frozen — like-for-like replacement in perpetuity.

Everything on your banking book that is affected by interest rate changes. Loans, bonds, deposits, swaps, committed facilities — anything where the value or cashflows change when rates move. Excludes things like your office building or goodwill.

Your bank's own internal assessment of how much capital you need to hold for all risks, including IRRBB. For IRRBB specifically, you need to demonstrate you understand your risk profile, have appropriate limits, and hold sufficient capital buffers under stress.

The process where your regulator reviews everything — your risk management, governance, capital adequacy, liquidity, and business model. For IRRBB, they'll assess your measurement framework, data quality, model assumptions, governance, and capital allocation.

The international body that writes the global rulebook for bank regulation, including the IRRBB standards (BCBS 368/d368). National regulators then implement these into local rules. Think of BCBS as the template that EBA, PRA, APRA etc. translate into local regulation.

Your core equity capital — ordinary shares, retained earnings, and qualifying reserves. It's the capital base against which the EVE SOT threshold is measured. When regulators say your EVE change must not exceed 15% of Tier 1, CET1 is the dominant component of that denominator.

The EU's legal implementation of Basel standards. CRD is the directive (implemented into national law by each member state), CRR is the regulation (directly applicable). IRRBB requirements sit primarily under CRD Article 84 and the EBA guidelines that flow from it.

Your in-house IRRBB model — the one you actually use to manage risk, as opposed to the standardised regulatory calculation. Regulators allow (and expect) banks to use their own models, but they must meet prescribed standards for sophistication, governance, and validation.

When BCBS or EBA proposes new IRRBB rules, they ask banks to calculate what the impact would be under the new framework. The aggregated results inform whether the proposals need recalibrating before they become final standards.

The committee where treasury, finance, risk, and business heads come together to make decisions about interest rate risk, liquidity, funding, and capital. Typically chaired by the CFO or CRO. This is where hedge strategies get approved and risk appetite gets set.

The discipline of ensuring your assets and liabilities are structured so the bank can meet its obligations, maintain stable earnings, and preserve economic value across different rate and liquidity environments. ALM sits at the intersection of treasury, risk, and finance.

The reports, dashboards, and data feeds that get IRRBB information from the models to the decision-makers. This includes ALCO packs, daily risk reports, limit monitoring, and regulatory reporting (e.g. FSA017, EBA IRRBB returns).

Your bond portfolio is marked to market, but the gains and losses don't hit your income statement — they go through a reserve in equity instead. You still see the economic impact on your balance sheet, but your reported earnings are shielded from rate-driven fair value swings.