Summary IRRBB governance in mid-size banks is often bounded by the capacity of the ALM function. That does not reduce supervisory expectations; it changes how they are met.
The two lenses EVE captures the impact of rate changes on the economic value of the balance sheet; NII captures the impact on earnings over a defined horizon. Optimising one can degrade the other; both must be governed against appetite.
Standardised outlier tests Supervisory outlier tests set a floor for capitalisation of IRRBB exposure. Internal frameworks should not rely on the standardised shocks alone; they should include idiosyncratic and non-parallel scenarios.
Behavioural assumptions Non-maturity deposit modelling, prepayment behaviour, and pipeline hedging are the most sensitive assumptions. They should be evidenced, backtested and revalidated periodically.
Hedging governance Hedging decisions belong to ALCO against a defined appetite, with clear delegation to Treasury for execution. Documentation should tie each hedge to a specific exposure and rationale.
MI Board-level MI shows utilisation against appetite, sensitivities to defined shocks, and forward exposures under strategic scenarios.
Limitations IRRBB is inherently a modelled risk with material behavioural assumptions. Model risk management applies with full force.
Related expertise See [Market, Liquidity & ALM](/expertise/market-liquidity) and [Model Risk and Validation](/expertise/model-risk).
Frequently asked questions
What should risk leaders know about the two lenses?
EVE captures the impact of rate changes on the economic value of the balance sheet; NII captures the impact on earnings over a defined horizon. Optimising one can degrade the other; both must be governed against appetite.
What should risk leaders know about standardised outlier tests?
Supervisory outlier tests set a floor for capitalisation of IRRBB exposure. Internal frameworks should not rely on the standardised shocks alone; they should include idiosyncratic and non-parallel scenarios.
What should risk leaders know about behavioural assumptions?
Non-maturity deposit modelling, prepayment behaviour, and pipeline hedging are the most sensitive assumptions. They should be evidenced, backtested and revalidated periodically.
What should risk leaders know about hedging governance?
Hedging decisions belong to ALCO against a defined appetite, with clear delegation to Treasury for execution. Documentation should tie each hedge to a specific exposure and rationale.
What should risk leaders know about mI?
Board-level MI shows utilisation against appetite, sensitivities to defined shocks, and forward exposures under strategic scenarios.