24.1 The Standardized Approach in IRRBB
The Standardized Approach refers to the framework provided by the Basel Committee on Banking Supervision’s publication “Interest rate risk in the banking book” (April 2016), Section IV The Standardized Framework. As opposed to the Enhanced Approach, the Standardized Approach (SA) is a prescribed, general framework that banks may elect—or bank supervisors may require—to use and outlines structured, specific guidelines for measuring NII and EVE.
In addition to providing a robust solution for satisfying the more general, subjective requirements for an Enhanced Approach for IRRBB, Oracle ALM also provided key components for satisfying the Standardized Approach. These include:
- Embedded Option Market Valuation, including Volatility Shocks
- Standardized Rate Shocks
- Standardized CPR and Early Redemption Scalars
- Scenario-based behavior Patterns
- Amenability dimensions in Products and Accounts
- Currency Materiality Test
- Wholesale and Retail Classifications
- Margin as a Fixed Rate for Interest Rate Gap
These Standardized Approach features, used in conjunction with other Application components, allow users to satisfy the key requirements in the Standardized Approach.
Standardized Approach Interest Rate Shocks
An integral feature of the Standardized Approach is the Standardized Approach Shocks on yield curves. For more information, see the Forecast Rate Calculations and Forecast Rates Scenarios section of OFS ALM User Guide.
Standardized Approach Prepayment and Term Deposit Redemption Rate Scalars
Additionally, closely related to the Standardized Approach Shocks for yield curves are the shock scalars for prepayments and early redemption models. For more information, see the Cash Flow Calculations.
Margin as a Fixed Rate for Interest Rate Gap
Per IRRBB Specifications, regulators may require banks separate the discretionary "commercial margins" of adjustable rate instruments and treat them as if they were fixed-rate coupons for interest rate gap reporting purposes (BCSB IRRBB Publication, April 2016, pg 24). When enabled, the margin of adjustable rate instruments continue generating interest cash flows after a gap repricing event up until contractual maturity or other total runoff. This feature supports all existing and forecasted new business instruments, including repricing patterns and transaction strategies. Rate Tiered instruments are not supported at this time. This feature is available when “Repricing Gap” is enabled in Calculation Elements.