Insights on Banks’ Recourse to Behavioural Models from a Focused IRRBB Stress Test

Federico Pierobon

In 2017, the European Central Bank (ECB) conducted the sensitivity analysis of interest rate risk in the banking book (IRRBB), the 2017 supervisory stress test for banks under its direct supervision. A total of 111 banks domiciled in all euro area jurisdictions were involved. Banks’ exposure to IRRBB was measured under both net interest income (NII) and economic value of equity (EVE) perspectives. Banks were asked to simulate the impact of six heuristic instantaneous interest rate shocks: two parallel shifts of +/–200bp; three shocks calibrated upon guidance from the Basel Committee of Banking Supervision (see BCBS, 2016); and a return of risk-free yields to their end-2010 levels. The main results of the exercise were reported in ECB (2017).

Banks’ recourse to behavioural models in their asset and liability management (ALM) was subject to dedicated analyses with the aim of benchmarking existing practices and detecting potential sources of vulnerability. The exercise focused on the assessment of models of non-maturing deposits (NMDs) and loan prepayment. The data collection and quality assurance activities also touched upon other model types, such as those employed by banks to map