Institutions should identify all positions in interest sensitive instruments including:
(i)
All assets, which are not deducted from Common Equity Tier 1 (“CET1”) capital, and which exclude (a) fixed assets such as real estate or intangible assets and (b) equity exposures in the banking book.
(ii)
All liabilities, including all non-remunerated deposits, other than CE1 capital ; and
(iii)
Off-balance sheet items.
6.2.2
Institutions should reconcile their exposures against their general ledger and their published financials. Differences may arise for valid reasons, which should be documented. This reconciliation process should be included in the model documentation and should be verified by the finance team on a yearly basis.
6.2.3
Changes in expected earnings and economic value can be captured through several possible metrics. At a minimum, the following metrics should be computed. These are referred as “IRRBB metrics”:
(i)
Gap risk: It is defined as the difference between future cash in-flows and cash-outflows generated by both assets and liabilities. The cash in-flows and out-flows are derived from the allocation of all relevant interest rate sensitive instruments into predefined time buckets according to their repricing or their maturity dates. These dates are either contractually fixed or based upon behavioural assumptions. The resulting metrics is the net position (gap) of the bank per future time bucket.
(ii)
Gap risk duration: Also referred to as partial duration or partial “PV01”. It is defined as the modified duration of the gap per maturity bucket. The modified duration is the relative change in the present value of the position caused by a 1 basis point change in the discount factor in a specific maturity bucket. The resulting metrics is a term structure of PV01 per maturity bucket.
(iii)
Economic value of equity: Also referred to as “EVE”. It is defined as the difference between the present value of the institution’s assets minus the present value of liabilities. The change in EVE (“∆EVE”) is defined as the difference between the EVE estimated with stressed discount factors under various scenarios, minus the EVE estimated with the discount factors as of the portfolio reporting date.
(iv)
Net interest income: For the purpose of the MMG, and in order to simplify notations, both Net Interest Income (for conventional products) and/or Net Profit Income (for Islamic Products) are referred to as “NII”, defined as the difference between total interest (profit) income and total interest (profit) expense, over a specific time horizon and taking into account hedging. The change in NII (“∆NII”) is defined as the difference between the NII estimated with stressed interest rates under various scenarios, minus the NII estimated with the interest rates as of the portfolio reporting date. ∆NII is also referred to as earning at risk (“EAR”).