Interest Rate Risk in the Banking Book (IRRBB), part 1

Our virtual bank is open for business. We start with a simple balance sheet and examine where interest rate risk comes from and how changes in interest rates can affect the bank.

This gives us the foundation for understanding the more complex products and behaviours we will introduce later.

Explore a real bank’s financial statements and connect published figures to the different dimensions of IRRBB.

Understand the key assumptions behind NII@R and NPV/EVE@R and how they shape a bank’s interest-rate risk profile.

Now we add our first real product: current accounts. And we’ll see that there are two fundamentally different ways of thinking about what these deposits mean for a bank.

From an income perspective, investing current-account deposits long-term looked rather attractive. But what happens to the value of those investments when interest rates change?

So how do banks actually model current accounts? Let’s move from our two theoretical views to the best-practice approach used in IRRBB.

We now have everything we need to calculate the IRRBB profile of our current accounts. Let’s put the pieces together and see what happens to value when interest rates change.

How greed, fear, and circumstances tend to push banks toward a buy-high, sell-low pattern.

Compare published IRRBB profiles of European banks and discover a remarkably consistent pattern.

Understand why mortgages require behavioural modelling and explore the models needed across the mortgage life cycle.

Explore four key behavioural effects that drive mortgage prepayments and ultimately shape mortgage interest-rate risk.

Compare different approaches to calibrating prepayment models and explore why calibration can be surprisingly difficult.

Learn how stochastic valuation techniques turn modelled mortgage cash flows into an IRRBB profile.

Compare different approaches to hedging mortgage interest-rate risk, from cash-flow hedges to more sophisticated techniques.

Discover why mortgage optionality can create a recurring hedge-rebalancing problem—even with a good prepayment model.