How to Manage and Cover IRRBB (BCBS 368) Using SAP TRM, SAP FPSL, SAP IFRA and SAP PaPM

Conceptual Introduction The revised BCBS 368 framework fundamentally transforms how banks manage Interest Rate Risk in the Banking Book (IRRBB). By introducing globally standardized measurement approaches, prescribed EVE/NII shock scenarios, behavioral modelling expectations, governance requirements, and mandatory disclosures, the standard brings IRRBB close to a de-facto Pillar 1 regime — even though capital requirements formally remain under Pillar 2. This shift forces a stronger convergence between risk and finance: banks must ensure that IRRBB metrics, IFRS valuations, hedge accounting, and profitability steering all rely on consistent data, models, and assumptions. As a result, institutions increasingly need integrated architectures that connect ALM engines, accounting platforms, and performance management systems to deliver reconciled reporting, ICAAP alignment, and strategic balance-sheet steering across the group. A robust architecture is needed to link: risk measurement (IRRBB) IFRS valuation and hedge accounting profitability and performance impact balance-sheet simulation capital and liquidity planning consolidated steering across entities full reconciliation from risk to finance SAP provides a complete solution through the integration of: SAP TRM — Risk & ALM engine SAP FPSL — Subledger and IFRS valuation SAP IFRA — Integrated data and reconciliation layer SAP PaPM — Simulation, profitability, steering, ICAAP/ILAAP, capital and NII modelling 1. SAP TRM: IRRBB Measurement and ALM Simulation SAP TRM remains the core risk engine generating IRRBB metrics: Cashflow generation (contractual + behavioral) TRM produces granular cashflows for all banking-book instruments including non-maturing deposits, loans, securities, wholesale funding, and derivatives. BCBS 368 standardized IRRBB scenarios TRM runs mandatory shocks for: EVE and NII parallel / steepener / flattener short-rate up/down internal ICAAP scenarios EBA stress test scenarios Hedging simulation Including: IRS, CCS options for optionality risk macro and micro hedging replicating portfolio strategies Output: ΔEVE, ΔNII, PV01, convexity, risk decomposition. 2. SAP FPSL: IFRS Valuation, Hedge Accounting and Risk Disclosures SAP FPSL ensures that IRRBB outputs integrate cleanly into IFRS accounting and regulatory reporting: IFRS 9 classification & measurement Supports AC, FVOCI, FVTPL, and the EIR method. IFRS 13 fair-value valuation Using the same curves and models as TRM → ensuring consistency. IFRS 7 disclosures Automatically generates: interest-rate sensitivity tables maturity gaps fair-value hierarchy hedge effectiveness measures IFRS 9 hedge accounting Including: fair value hedges cash flow hedges macro hedge models ineffectiveness posting FPSL ensures financial statements reflect ALM and risk positioning accurately. 3. SAP IFRA: Integrated Risk–Finance Data Foundation and Reconciliation SAP IFRA provides the data consolidation, integration, and reconciliation layer for the entire finance and risk architecture. However, its role goes far beyond mere aggregation: IFRA operates as the central engine of data governance, establishing a controlled, traceable, and fully standardized data foundation. It enforces a true “single version of the truth” across all products, legal entities, and jurisdictions, ensuring that risk, finance, and performance calculations all rely on identical datasets, definitions, and valuation parameters. Become a member This capability is critical for regulatory compliance, especially under the increasingly stringent expectations of authorities such as the European Banking Authority (EBA) and the wider EU regulatory framework. Supervisors now demand consistent, reconciled, and auditable data quality across risk measurement (IRRBB, liquidity, credit), financial reporting (IFRS 9/13), and consolidated group oversight (ICAAP/ILAAP). IFRA directly addresses these requirements by providing transparent data lineage, automated reconciliation between risk engines and subledgers, and harmonized reporting structures — enabling banks to meet regulatory expectations while operating with higher accuracy, lower operational risk, and stronger governance. Unified Finance–Risk data model Harmonizes: position data cashflows valuation parameters master data market data and curves accounting classifications End-to-end reconciliation IFRA reconciles: TRM ↔ FPSL subledger ↔ general ledger risk valuations ↔ IFRS valuations entity-level ↔ group-level reporting Consolidated reporting environment Feeds: ICAAP / ILAAP ALCO dashboards group risk reporting regulatory templates Scenario Management IFRA allows simultaneous multi-scenario runs for accounting, risk, planning, and steering. 4. SAP PaPM: Profitability, Simulation, Planning and IRRBB Steering SAP PaPM extends TRM, FPSL, and IFRA by providing the performance, scenario, and capital simulation engine required for IRRBB and ICAAP. 4.1 NII forecasting and margin analysis PaPM uses TRM cashflows combined with: product-level transfer pricing dynamic balance sheet projections behavioral models hedge strategies This allows banks to simulate: forward NII under regulatory shocks hedge effectiveness on future earnings banking-book margin scenarios FTP strategy optimization 4.2 Integrated ICAAP modelling PaPM processes: risk-weighted assets (RWAs) capital projections ΔEVE/ΔNII impacts stress test results management buffers (P2G) It links IRRBB to: CET1 ratio evolution internal capital targets stress capital plans 4.3 Profitability and performance management PaPM allocates IRRBB impacts to: products entities business units customer segments Supporting: ALM steering pricing decisions commercial planning FTP curve calibration 4.4 Advanced simulation engine PaPM can run: thousands of scenarios machine-learning based models balance sheet projections strategic planning simulations hedging policy optimization This is a core differentiator vs. TRM/FPSL. 5. End-to-End SAP Architecture for IRRBB, IFRS, and Performance Steering SAP TRM — Risk & ALM Engine Generates contractual and behavioral cashflows Applies IRRBB shocks (EVE and NII) Executes hedging simulations Produces core ALM and IRRBB risk metrics SAP IFRA — Integration & Reconciliation Layer Consolidates and harmonizes data from risk and finance Ensures end-to-end reconciliation across systems Provides governance and data lineage Acts as the unified foundation for downstream processing SAP FPSL — IFRS Subledger Performs IFRS-compliant valuation and accounting Supports IFRS 9 hedge accounting Generates IFRS 7, IFRS 9, and IFRS 13 disclosures Aligns risk valuations with financial statements SAP PaPM — Performance & Steering Engine Produces NII forecasts and earnings simulations Supports ICAAP modelling and scenario expansion Enables capital planning under stress and baseline conditions Delivers profitability, FTP, and performance analytics Overall Result A unified, reconciled, and transparent architecture linking risk measurement, financial reporting, and strategic performance management. 6. How SAP TRM + FPSL + IFRA + PaPM Cover BCBS 368 and IFRS Requirements The combined SAP architecture covers all major BCBS 368 and IFRS requirements through complementary capabilities across TRM, IFRA, FPSL, and PaPM. The coverage can be summarized as follows: EVE and NII Sensitivity Required by BCBS 368. Supported by SAP TRM, IFRA, and PaPM (including impact and steering capabilities). Behavioral Modelling Required for non-maturing deposits and prepayment optionality under BCBS 368. Supported by SAP TRM, IFRA, and PaPM. Scenario Analysis Mandatory under BCBS 368 for supervisory and internal scenarios. Performed by SAP TRM and IFRA, with PaPM enabling advanced and strategic scenario extensions. Hedging Required for supervisory purposes under BCBS 368 and governed by IFRS 9 for accounting. Fully supported across SAP TRM, IFRA, FPSL (for hedge accounting), and PaPM (for hedge effectiveness and steering). Fair Value Measurement Required under IFRS 13. Supported by SAP TRM, IFRA, and FPSL. Accounting and Valuation Required under IFRS 9. Supported by SAP IFRA and FPSL. Risk–Finance Reconciliation Expected under BCBS governance and required under IFRS. Delivered through SAP IFRA and FPSL. Profitability and Performance Management Not mandated by BCBS or IFRS, but essential for internal steering. Supported by SAP IFRA and SAP PaPM. ICAAP Integration Required under BCBS 368 for Pillar 2. Supported by SAP TRM, IFRA, and PaPM. Capital Planning Required for internal management and supervisory expectations. Supported by SAP IFRA and PaPM. 7. Final Conclusion The integration of SAP TRM, SAP IFRA, SAP FPSL, and SAP PaPM provides a comprehensive, reconciled, and fully auditable end-to-end solution for IRRBB under BCBS 368. TRM → measures IRRBB IFRA → consolidates and reconciles FPSL → delivers IFRS accounting & valuation PaPM → simulates, plans, allocates, and steers This enables banks to: comply with BCBS 368 align risk and finance integrate IRRBB into ICAAP forecast profitability and capital optimize hedging and pricing steer performance across the group Connect and Stay Informed: Join the Conversation: Connect with fellow professionals in the SAP Banking Group on LinkedIn. https://www.linkedin.com/groups/92860/ Stay Updated: Subscribe to the SAP Banking Newsletter for the latest insights. https://www.linkedin.com/newsletters/sap-banking-6893665983048081409/ Explore More: Visit the SAP Banking Blog for in-depth articles and analyses. https://sapbank.blogspot.com/ Connect Personally: Feel free to send a LinkedIn invitation; I’m always open to connecting with like-minded individuals. ferran.frances@gmail.com I look forward to hearing your perspectives. Kindest Regards, Ferran Frances-Gil. #SAPTRM #SAPFPSL #SAPIFRA #SAPPaPM #SAPBanking #SAPFinance #SAPRisk #RiskFinanceIntegration #DataReconciliation #IFRSCompliance #ALMSolutions #IRRBBManagement