SAP IRRBB in the EBA Era: EVE, NMDs, and CSRBB as Structural Design Variables

Introduction – From Regulatory Metric to Balance Sheet Architecture Interest Rate Risk in the Banking Book (IRRBB) has quietly crossed a point of no return. What was once a periodic regulatory calculation—performed quarterly, reconciled manually, and explained defensively—has become a structural property of the balance sheet itself. Under the combined pressure of BCBS 368, the EBA IRRBB Guidelines, and the newly finalized EBA Heatmap framework (2024–2026), IRRBB is no longer asking how much interest rate risk a bank has. It is asking something far more fundamental: Is the balance sheet internally coherent under stress? This shift is not semantic. It is architectural. The stabilization of interest rates after the most aggressive tightening cycle in decades has not reduced IRRBB relevance—it has exposed structural weaknesses that were masked by rising rates. The EBA’s latest supervisory findings confirm this paradox: while fewer banks breach the 15% Tier 1 capital EVE outlier test, the improvement is driven as much by the rate environment as by genuine risk mitigation. Consequently, supervision has moved decisively away from outcomes and toward model robustness, behavioral realism, and governance discipline. At the center of this transformation lie three interdependent pillars: Economic Value of Equity (EVE) as a structural valuation metric Non-Maturing Deposits (NMDs) as embedded behavioral options Credit Spread Risk in the Banking Book (CSRBB) as a missing dimension of economic risk Managing these dimensions in isolation is no longer viable. Only an integrated architecture, where valuation, behavior, accounting, and governance coexist on a single data foundation, can support the level of transparency and intentionality now demanded by supervisors—and by markets. 1. The Post-2026 Regulatory Paradigm: What the EBA Is Really Testing The EBA Heatmap is often misunderstood as a refinement of the traditional outlier test. In reality, it represents a change in supervisory philosophy. Historically, IRRBB supervision focused on whether a bank breached a numerical threshold under standardized shocks. Today, the emphasis has shifted to why the number looks the way it does. The Heatmap introduces a multidimensional supervisory lens that evaluates: The sensitivity of EVE and NII to prescribed shocks The credibility of behavioral assumptions (especially NMDs and prepayments) The consistency between internal risk management, accounting treatment, and Pillar 3 disclosures The governance underpinning model approval, validation, and change management A bank that reports a low EVE sensitivity but cannot explain its NMD duration, pass-through assumptions, or spread treatment is no longer viewed as conservative—it is viewed as opaque. This is particularly evident in three areas of supervisory escalation: The reaffirmation of the 5-year cap on NMD average repricing maturity The formalization of CSRBB as a Pillar 2-relevant risk The expectation of dynamic, scenario-consistent modeling, even when reporting static metrics 2. EVE and NII: Two Lenses, One Balance Sheet Modern IRRBB management requires a deliberate reconciliation of two fundamentally different perspectives. Economic Value of Equity (EVE) EVE measures the change in the present value of all future balance-sheet cash flows under interest rate shocks. It is inherently long-term, structural, and economic. Key regulatory characteristics: Six prescribed shocks (parallel, steepener, flattener, short-rate up/down) Risk-free discounting preferred for supervisory comparability Commercial margins treated conservatively, typically under constant-spread assumptions A hard supervisory focus on the 15% Tier 1 capital threshold EVE does not care about accounting periods. It asks whether the bank’s funding structure, optionality, and duration profile are sustainable under stress. Net Interest Income (NII) NII captures the earnings volatility generated by interest rate movements over a short-to-medium horizon (typically 1–3 years). Unlike EVE, NII is: Highly sensitive to repricing asymmetries Exposed to deposit floors and zero-lower-bound effects Dependent on dynamic balance-sheet assumptions The EBA has explicitly highlighted that, in the current environment, downward rate shocks are often more punitive for NII than upward shocks—precisely because assets reprice faster than deposits. The Strategic Tension Optimizing EVE often conflicts with stabilizing NII. Long-dated hedges may protect economic value while introducing short-term P&L volatility. Treating these metrics separately leads to suboptimal decisions. Treating them jointly—within a single architectural framework—turns IRRBB into a strategic ALM tool. 3. Non-Maturing Deposits: The Core Structural Risk No component of IRRBB attracts more supervisory scrutiny—or causes more internal confusion—than Non-Maturing Deposits. Contractually, NMDs are overnight liabilities. Economically, they behave like long-dated, callable funding instruments written by customers and priced implicitly by the bank. The Behavioral Decomposition Regulation requires banks to decompose NMDs into: Non-stable balances: volatile, rate-sensitive, or transactional Stable balances: persistent over time and less sensitive to rates Core balances: the subset of stable deposits that can be assigned a behavioral maturity This decomposition must be supported by historical evidence, typically spanning at least ten years, and must remain conservative under stress. The 5-Year Cap The EBA’s reaffirmation of the 5-year average repricing maturity cap is not arbitrary. It is a prudential constraint designed to prevent banks from manufacturing duration through optimistic behavioral assumptions. Importantly, the cap applies after behavioral modeling. It does not replace modeling—it limits its outcome. Pass-Through, Decay, and Optionality Supervisors now expect explicit modeling of: Deposit beta (pass-through of market rates to deposit pricing) Decay and attrition rates under different rate environments Asymmetric behavior between rising and falling rate cycles Static averages are no longer defensible. NMDs must be treated as state-dependent instruments whose value and duration change with the interest rate path. 4. CSRBB: Completing the Economic Risk Picture The formal inclusion of Credit Spread Risk in the Banking Book (CSRBB) marks one of the most consequential regulatory shifts of the current cycle. CSRBB captures changes in economic value driven by market-wide spread movements, distinct from idiosyncratic credit risk and from pure interest rate risk. Supervisory expectations are clear: Assets at amortized cost are not exempt if they are economically sensitive to spreads If credit spreads are considered internally, they must appear consistently in Pillar 3 disclosures Banks must distinguish between credit and liquidity components of spreads CSRBB forces institutions to confront an uncomfortable truth: ignoring spreads does not eliminate spread risk—it simply hides it until stress materializes. 5. The SAP Integrated Architecture: From Fragmentation to Coherence Meeting these expectations is impossible with fragmented systems and spreadsheet overlays. The challenge is not computational—it is architectural. SAP addresses IRRBB through an end-to-end, integrated framework built on S/4HANA: SAP Treasury and Risk Management (TRM) The valuation and sensitivity engine: Contract-level cash-flow generation Embedded optionality (prepayments, caps, floors) Automated execution of all BCBS-prescribed shocks Risk-free and spread-adjusted discounting frameworks SAP Profitability and Performance Management (PaPM) The behavioral intelligence layer: High-volume historical analysis of deposit behavior Segmentation, beta estimation, decay modeling Dynamic “what-if” simulations Direct reuse of behavioral outputs for FTP SAP Financial Products Subledger (FPSL) The single source of truth: Unified storage of valuations, cash flows, and accounting entries Native reconciliation between IFRS 9 and IRRBB views Full auditability from EVE deltas to individual contracts Together, under the Integrated Finance and Risk Architecture (IFRA), these components eliminate the traditional boundary between Risk, Finance, and Treasury. 6. From Compliance to Strategic ALM Once IRRBB metrics are produced on a unified architecture, their role changes fundamentally. EVE becomes a design constraint, not a surprise NII becomes an optimization variable, not a volatility to explain Hedging becomes structural engineering, not tactical defense Macro-hedging strategies can be calibrated precisely to remain within supervisory thresholds while minimizing earnings volatility. Behavioral deposit models inform not only risk metrics, but deposit pricing, liquidity valuation, and capital allocation. Funds Transfer Pricing ceases to reward volume and begins to reward stability and optionality management. Conclusion – IRRBB Is No Longer About Measuring Risk IRRBB has outgrown its regulatory origins. Under the EBA Heatmap and BCBS 368, it has become a diagnostic of balance-sheet architecture. Banks that treat it as a reporting exercise will remain reactive—explaining yesterday’s numbers to supervisors. Banks that treat it as the operating system of the balance sheet will decide, deliberately, how risk, profitability, and capital interact. Non-Maturing Deposits are not overnight liabilities. EVE is not a sensitivity report. CSRBB is not optional. They are structural realities. When valuation, behavior, accounting, and governance are unified on a single in-memory architecture, IRRBB stops being a constraint and becomes a capability. The balance sheet becomes a digital twin—traceable, stressable, and optimizable in real time. At that point, regulatory thresholds are no longer limits to fear. They are engineering parameters. And IRRBB is no longer about risk. It is about what kind of bank you are building. 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