BANK 8.1.11 Guidance

A banking business firm's approach to evaluating and managing IRRBB as part of its ICAAP should include the following:

(a) the internal definition of, and the boundary between, banking book and trading book;
(b) a definition of economic value showing that it is consistent with the method used to value assets and liabilities;
(c) the size and form of the different interest rate changes to be used for stress-testing;
(d) whether a dynamic or static approach is used to decide the effect of interest rate changes is used;
(e) how to treat pipeline transactions (including any related hedging);
(f) how to aggregate multi-currency interest rate exposures;
(g) whether or not non-interest-bearing assets and liabilities, capital and reserves are included in the evaluation;
(h) how to treat current and savings accounts (that is, the maturity attached to exposures without a contractual maturity);
(i) how to treat fixed-rate assets or liabilities, if customers have a right to repay or withdraw early;
(j) the extent to which sensitivities to small changes can be scaled up linearly without significant loss of accuracy (covering both convexity generally and the nonlinearity of pay-off associated with explicit option products);
(k) the degree of granularity employed (for example, offsets within a time band or zone);
(l) whether all future cash flows or only principal balances are included.
Derived from QFCRA RM/2014-2 (as from 1st January 2015).