IRRBB Enhancements

The client, a cooperative bank, sought to enhance its Interest Rate Risk in the Banking Book (IRRBB) framework to ensure alignment with evolving regulatory expectations and industry best practice. The bank’s Risk Department identified a series of improvements, including policy review, basis risk assessment, model enhancements, stress testing documentation, and consideration of off-balance sheet exposures. Avantage Reply was engaged to provide external expertise to deliver these improvements. Through a structured approach, Avantage Reply supported the bank in developing a more robust, well-documented IRRBB framework that aligns with supervisory expectations, strengthens risk governance, and better reflects the bank’s specific risk profile and business model. 

CUSTOMER GOALS

The bank’s primary goal was to improve the quality and regulatory compliance of its IRRBB framework. This included ensuring that its policy, modelling approaches, stress testing framework, and treatment of off-balance sheet exposures were in line with supervisory expectations and industry best practice. By doing so, the bank aimed to enhance its overall risk management capability and demonstrate sound governance to regulators. CHALLENGES

The bank faced regulatory and operational challenges in meeting evolving IRRBB requirements. Supervisors expect clear, well-documented IRRBB policy aligned with industry best practice and tailored to the bank’s size and business model. The bank needed to reassess basis risk materiality, enhance models to account for interest rate floors, and ensure its stress testing framework met internal and regulatory expectations. Additionally, the bank needed to evaluate whether its IRRBB framework adequately captured off-balance sheet exposures, particularly committed but undrawn credit facilities.

SOLUTION

Avantage Reply provided targeted external support across the IRRBB enhancement workstream. Consultants critically reviewed the bank’s IRRBB policy against regulatory expectations and industry best practice, identifying areas for revision. The team worked with the bank to reassess the materiality of basis risk given its business model, ensuring risk assessments were proportional and meaningful. Avantage Reply also supported the enhancement of IRRBB modelling to incorporate interest rate floors, and delivered a comprehensive documentation of the bank’s stress testing framework covering both internal and regulatory stress scenarios. Finally, the consultants analysed the need to include off-balance sheet exposures in IRRBB modelling, offering clear recommendations for managing these risks in line with supervisory expectations. 

CUSTOMER DESCRIPTION

The customer is a cooperative bank known for its commitment to clients, responsible management, and personalized services tailored to local needs.