The Nature of IRRBB and Typical Metrics Employed

Jacek Rzeznik

To consider the management of interest rate risk arising from non-trading book activities and the metrics used to gauge this risk, it is essential to first start with defining and providing an overview of the sources of this risk. Once this has been achieved, it is possible to explore the nature of this risk and its different facets, which we will expore using both the net interest income (NII) and economic value (EV) perspectives, as well as by examining the interaction between them and the importance that behavioural models play in this regard. Finally, we will introduce some of the typical metrics employed by banks to measure the risk from each perspective.

DEFINITION AND SOURCES OF IRRBB

Since the early days of banking, activities and services offered to clients have served the purpose of transformation and intermediation on various levels.

    • Volume: Many individual deposits funding large loans.

    • Term (maturity): Deposits available at sight and loans offered for longer periods (such as a 30-year mortgage).

    • Cost of borrowing/interest rate preference: Offering fixed and floating rate products.

    • Currency: Deposits or capital available in one

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