IRRBB: Its Links to the Operating Plan and Stress Testing

Paul Newson

The measurement of IRRBB, particularly when using income metrics, is linked inextricably to the planning process, and indeed IRRBB can in many ways be thought of as the risk of not achieving the operating plan. In some banks, however, risk and planning are performed in separate silos – and this chapter will set out the case for this being a serious deficiency.

The chapter will then consider stress testing, which is becoming an increasingly used technique in respect of all risks but is particularly important in case of IRRBB as the impact of interest rate changes can only be assessed if consideration is also given to all the various assumption that the bank has to make about behaviour. The level of total potential loss inherently requires the consideration of a number of adverse scenarios to pinpoint vulnerabilities.

THE OPERATING PLAN

The operating plan constitutes an overall business projection of the bank’s likely profitability over the medium term. It is typically prepared on an annual basis, usually towards the end of each calendar year, and will comprise mainly a relatively detailed projection of the next year’s income and costs segmented by major business area, and