Articles

In this article, we define IRRBB, explain why maturity transformation creates structural rate exposure, introduce the two measurement perspectives (ΔNII and ΔEVE), walk through the BCBS framework and its six standardized scenarios, and examine the fundamental tension — why hedging one metric often worsens the other.

In this article, we compare the two core IRRBB metrics side by side — what each measures, what drives it, and why the same +200bp shock can produce a positive ΔNII and a negative ΔEVE on the same balance sheet — with a worked example showing how repricing gaps and duration gaps pull in opposite directions.

In this article, we cover the end-to-end process of curve construction for IRRBB — choosing the right instruments (OIS/SOFR), bootstrapping from par rates to zero rates, selecting an interpolation method (flat forward, linear, cubic spline), and avoiding the convention mismatches and stale-quote pitfalls that silently bias ΔEVE.

In this article, we build the sensitivity toolkit from first principles — modified duration as the linear approximation, convexity as the second-order correction for large shocks, DV01 as the dollar measure for hedge sizing, and key rate duration for decomposing risk across the curve — with a worked comparison of bullet vs amortizing instruments.

In this article, we explain why deposits with no contractual maturity are the most consequential assumption in IRRBB — how deposit beta drives ΔNII, how core/volatile decay modeling drives ΔEVE, why betas are asymmetric, what the BCBS caps enforce, and how the difference between assumptions can swing ΔEVE by billions of dollars.

In this article, we treat the mortgage as a bond with an embedded call option — introducing CPR, the logistic S-curve model, the burnout effect, and the negative convexity that makes duration itself unstable — with a worked example showing how three different CPR assumptions change ΔEVE by hundreds of millions.

In this article, we cover the full scenario design toolkit — the BCBS six standardized scenarios, historical simulation of real episodes (2008, 2013, 2022), PCA-based statistical shocks, and the partial-information method that infers unspecified tenors algebraically — and argue that scenario selection matters more than model precision.

In this article, we walk through the derivatives toolkit for IRRBB management — interest rate swaps for closing duration gaps, DV01 matching for hedge sizing, caps and collars for asymmetric NII protection, swaptions for behavioral optionality, the caterpillar hedge for rolling coverage, and the hedge accounting requirements that constrain instrument choice.

In this article, we explain how Principal Component Analysis extracts three dominant factors — shift, twist, and butterfly — from the covariance matrix of daily rate changes, why they explain 95%+ of all curve dynamics, and how this decomposition informs scenario design, risk attribution, model selection, and hedge efficiency analysis.

In this article, we examine why the static balance sheet assumption — while useful for comparability — describes a bank that doesn't exist, and how dynamic approaches incorporating new production, deposit migration, and endogenous pricing decisions change the ΔNII picture, along with the governance challenges that make regulators cautious.

In this article, we decompose the break-even loan rate into its fundamental building blocks — the risk-free reference rate, the funding curve, the term liquidity premium, the contingent buffer cost, expected credit loss, and the capital charges for credit risk and IRRBB — showing what each basis point is actually paying for and why the all-in neutral price is the floor below which the bank destroys value.

In this article, we examine why three defensible estimates of the term liquidity premium — the locked-in spread (66 bps), the expected cost (26 bps), and the risk-charged rate (42 bps) — can land on the same desk, and we trace the reasoning that identifies which one belongs in the transfer price and why the other two, though correct in their own context, would misprice the loan.

In this article, we follow the chain of reasoning that turns a maturity mismatch between assets and liabilities into a quantifiable basis-point charge — the term liquidity premium — and show how the structure of the funding book, the rollover schedule, and the shape of the credit curve determine what the bank must charge just to keep its funding in place.

In this article, we show how the weighted-average cost of funds drifts over the life of a fixed-rate loan as liabilities mature and roll at new rates — a mispricing that accumulates silently because the original transfer price assumed a static funding mix that no longer exists by the time the loan reaches its second year.

In this article, we explore the difference between the rate the bank locked in at origination and the rate the market will demand at the next rollover — and why the choice of ladder structure, repricing convention, and refunding calendar can move the effective cost of funds by dozens of basis points without a single market variable changing.

In this article, we examine the paradox at the heart of deposit pricing: the franchise is the bank's most valuable intangible asset — subsidizing every loan by dozens of basis points — yet crediting that subsidy to individual business units destroys the incentive to grow and preserve it, turning cheap funding from an achievement into a perceived birthright.

In this article, we tackle the gap between the contractual maturity of a demand deposit (overnight) and its behavioral maturity (often years), showing how replicating-portfolio methods, decay-rate models, and survival analysis each answer the same question differently — and why the number you choose changes the entire term structure of the bank's funding cost.

In this article, we show why charging a flat contingent liquidity premium across all maturities is a cross-subsidy hiding in plain sight — short-term products that trigger large buffer requirements are undercharged while long-term assets that barely touch the LCR constraint are overcharged — and how building a term structure for the buffer cost corrects the distortion.

In this article, we identify and price the financial options that borrowers hold inside standard loan contracts — prepayment rights, undrawn commitments, interest rate caps and floors, and rate-lock guarantees — showing that these are not fine print but instruments the bank has sold and must recover through the rate it charges or accept as an uncompensated risk.

In this article, we examine why point-in-time PD estimates systematically underprice credit risk during expansions and overprice it during downturns — and how a through-the-cycle expected loss framework avoids the trap of pricing loans to the current vintage, which is precisely when the loan that feels safest is the one most likely to destroy value.

In this article, we show why Gaussian volatility assumptions on funding spreads assign near-zero probability to crisis-scale events that have occurred twice in twelve years, how the CIR process generates the right tail weight by coupling volatility to the spread level through a single square root, and what that one missing term does to the transfer price on every loan on the book.

In this article, we map the taxonomy of liquidity uncertainty — from deterministic scenario tables through parametric stress tests to full Monte Carlo simulation — and identify the single modeling assumption (the shape of the outflow distribution) that outweighs every narrative stress scenario in determining the contingent liquidity charge.

In this article, we break down the two main liquidity cost components in Funds Transfer Pricing — the Term Liquidity Premium (the cost of locking in funding for a specific term) and the Contingent Liquidity Cost (the carry cost of holding emergency buffers) — with side-by-side comparisons, worked examples, and their links to NSFR and LCR regulatory requirements.

In this article, we explain why traditional return metrics fail to capture the true profitability of bank business units, and how RAROC (return on risk-adjusted capital), RORAC (return on regulatory capital), and RORWA (return on risk-weighted assets) each solve a different piece of the capital allocation puzzle — with practical guidance on when to use which metric and how they interact with FTP.