IRRBB – Support the transition of the IRRBB metrics computation tool and reconciliation exercise between both outcomes regarding EVE (Economics Value of Equity) and NII (Net Interest Income).

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The Client, a huge international bank, request the support of Avantage Reply to further understand and quantify the differences arising between both of their IRRBB metrics calculators. The first, is a hand-made tool provided by the headquarter and the second is a well-known risk software solution used locally. Avantage Reply helps isolating and assessing each of the differences, and in case of materiality, set processes in order to compute overlays. Avantage Reply further helps to add and validate missing products. Validations cover parametrization of the tool, alinement of IRRBB inputs (margin and reference rate) and models (non-maturing products, prepayment, caps, floors,..).

CUSTOMER GOALS

The customer was looking to have a proper understanding on both outcomes in order to simplify and align the explanation of the quarterly variations arising from both calculators.

CHALLENGES

Reconciliation exercise on IRRBB figures can be challenging as source of differences can be numerous. Difference between EVE and NII can arise from a broad range of parameters; as margin, market rates, prepayments, compounding frequency, valuation method, etc...

SOLUTION

Both top-down and bottom-up approached have been conducted in order to isolate and quantify each differences separately.

Two main type of differences have been spotted:

Differences due to methodology (curves used, compounding frequency, treatment of floating rate position, static vs dynamic balance sheet, etc..)
Differences due to scope (some products have been waivered from one or another calculator)

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