IRRBB & EVE Sensitivity Calculator
Simulate Basel III Interest Rate Risk in the Banking Book (IRRBB), model Economic Value of Equity (EVE) duration gaps, and evaluate the 15% Tier 1 Supervisory Outlier Test (SOT).
Balance Sheet Duration & ALM Parameters
IRRBB Capital & Earnings Sensitivity Audit
SOT CompliantDuration Gap & Economic Value Decomposition
| ALM Dimension | Value | Impact on Capital | Status |
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Rate Shock vs Asset Duration Sensitivity Matrix (ΔEVE / Tier 1 %)
Evaluate how varying portfolio asset duration alongside standardized rate shocks (+/- 100 bps to +/- 300 bps) impacts the bank's Economic Value of Equity as a percentage of Tier 1 Capital.
Understanding IRRBB & The Basel Supervisory Outlier Test (SOT)
Interest Rate Risk in the Banking Book (IRRBB) stems from the fundamental maturity transformation role of banks—borrowing short via demand deposits to lend long via mortgages and corporate loans. Following the 2023 regional bank collapses (where long-duration fixed securities suffered massive unhedged paper losses), international regulatory bodies (BCBS 368 / EBA Guidelines) enforced strict dual-metric monitoring:
1. Economic Value of Equity (EVE)
Measures the net present value of all balance sheet cash flows. EVE reflects the underlying economic net worth of the institution that would remain if all assets and liabilities were immediately liquidated.
2. The 15% SOT Threshold
If $|\Delta\text{EVE}|$ under a 200 bps parallel shock exceeds 15.0% of Tier 1 Capital, the bank is classified as an "Outlier Bank," triggering supervisory intervention, mandatory interest rate swaps, or Pillar 2 capital add-ons.
3. Net Interest Income (NII) Gap
Evaluates near-term earnings sensitivity. A positive gap (Rate-Sensitive Assets > Rate-Sensitive Liabilities) boosts net interest income during rate hikes, even while long-term EVE contracts.
Core Mathematical Formulas
A duration gap near zero insulates the bank's economic capital from rate volatility, ensuring balance sheet resilience across tightening and easing cycles.
IRRBB & ALM Knowledge Check Quiz
Frequently Asked Questions
What is Interest Rate Risk in the Banking Book (IRRBB) and how is it measured?
Interest Rate Risk in the Banking Book (IRRBB) refers to the current or prospective risk to a bank's capital and earnings arising from adverse movements in interest rates that affect its banking book positions. Regulators assess IRRBB through two complementary perspectives: (1) The Economic Value of Equity (EVE) perspective, measuring the long-term economic present value change of assets minus liabilities, and (2) The Net Interest Income (NII) perspective, measuring near-term 12-to-24-month earnings sensitivity.
What is the Basel Supervisory Outlier Test (SOT) for EVE sensitivity?
Under the Basel Committee on Banking Supervision (BCBS 368) framework and EBA guidelines, the Supervisory Outlier Test (SOT) flags an institution as an 'Outlier Bank' if the decline in its Economic Value of Equity (Delta EVE) exceeds 15.0% of its Tier 1 Capital under any of the six standardized supervisory interest rate shock scenarios (+200 bps parallel up, -200 bps parallel down, steepener, flattener, short rate up, short rate down). Outlier status triggers Pillar 2 capital add-ons or mandatory balance sheet hedging directives.
How does duration gap determine a bank's Economic Value of Equity (EVE) sensitivity?
The duration gap measures the difference between the modified duration of a bank's assets and liabilities: Duration Gap = D_assets - (Liabilities / Assets) * D_liabilities. When a bank holds long-duration assets (e.g. 5 to 7 year fixed-rate mortgages or Treasuries) funded by short-duration deposits, a rapid rise in interest rates causes asset values to collapse much faster than liabilities, creating massive negative Delta EVE.
What is the relationship between NII sensitivity and EVE sensitivity?
NII sensitivity and EVE sensitivity often move in opposite directions. An asset-sensitive bank with floating-rate commercial loans benefits from higher near-term net interest income (+Delta NII) when central banks raise rates, even while the economic present value of its long-term fixed assets contracts (-Delta EVE). Prudent ALM management requires balancing near-term income generation with long-term solvency preservation.