The European Central Bank sensitivity analysis of Interest Rate Risk in the Banking Book (IRRBB), the supervisory stress test required for 2017, is still on its way, with the quality assurance phase running until end of May. Yet debate is already open on the challenges and the operational burden it poses on banks.
Prometeia, the global leader in Risk Management consulting and software solutions, is supporting over ten customers in the reporting production and the quality assurance phase using its proprietary ALM system, ERMAS.
The goal of the ECB is to collect thorough information on the exposure of supervised institutions to non-traded market risk, in order to detect potential vulnerabilities to specific interest rate scenarios and complete the SREP assessment for IRRBB.
Relevant information will not just be quantitative, referring to potential negative impacts both on EVE and on NII, but also qualitative, meaning that ECB will also consider data availability, timeliness, and the quality of information provided in order to assess internal governance, risk management effectiveness and system adequacy.
From a methodological point of view, the exercise refers to both EBA Guidelines on the Management of IRRBB, and the 2016 BCBS Standards on Interest Rate Risk in the Banking Book, from which the six shock scenarios are derived. Reading between the lines, given the short notice period and considering that BCBS standards have not yet been codified in European law, it seems that the ECB is trying to understand whether banks would be ready to comply with the new principles, and which specific methodological issues or approach might better fit European banks’ business models.
But what are the real challenges for risk managers in this exercise? It depends on the state of each bank’s individual risk management framework, ALM internal approach and systems capabilities.
A summary of main issues tackled:
Thanks to ERMAS, Prometeia’s flagship risk management platform, all figures and breakdowns required in the exercise are readily available, given the completeness and granularity of input data (including FTP and risk-free rates at origination for each deal), the analytical capabilities, and the high flexibility of the system configuration and output drill down.
ERMAS, Prometeia’s new generation of value-centric Risk solutions, is used by over 200 clients in more than 20 different countries to support their critical decisions and to comply with local and international regulatory requirements.
For further information, contact us.