In theory, all interest rate risk should be transferred to Treasury, all exposures hedged in the market, and all markets have the sufficient depth and width to do so. However, we all know that this “singing and dancing” situation is not the world we live in.

With this in mind, it's important to understand the sources of IRRBB in the bank, who owns them, why they exist, and what is the P&L sensitivity that those generate. 

Limitations of the traditional IRRBB approach

Traditional IRRBB analysis assesses how the bank’s total NII responds to interest rate shocks. Although useful from a regulatory perspective, this view does not explain:

• Who owns the interest rate risk within the bank.

• How much risk is transferred to Treasury versus retained by business lines (i.e. any convexity or non-stable portions of NMDs)

• Whether all exposures can realistically be hedged in the market.

• If the market has enough width in terms of available instruments

• Whether Treasury making P&L in some open positions

As a result, management lacks transparency on how risk is generated, transferred, and absorbed across the organization, and how ultimately this impacts the bank´s NIM.

The IRRBB Booking Model: identifying, isolating, and allocating risk

The implementation of 2.0 IRRBB management framework requires a system in place  to be able to book each of the risk exposures individually at a line of business. Also, it requires breaking silos between ALM and Treasury. That is understanding if treasury is buying the risk out of the business lines as prescribed in the IRRBB policy, or its deviating, and the reasons behind each misalignment. Bridging the gap between ALM  

(IRRBB Policy) and Treasury (actual risk buy-in booked in treasury systems) has to form part of the IRRBB management framework, but is not always the case.

The IRRBB Booking Model represents a shift from a purely aggregated view to an operational framework that enables the decomposition of NII sensitivity by line of business and risk factor.

The model is built on three core principles:

1. Rolling out NII  sensitivity metrics  by line of business, leveraging front-book FTP capabilities to understand how each activity contributes to overall interest rate risk.

2. Identifying and isolating IRRBB risk factors, distinguishing between identifiable and non-identifiable risks, as well as hedgeable and non-hedgeable exposures.

3. Allocating risk to its natural owner, whether Treasury, ALCO, or the business lines, based on actual hedging capacity and the bank’s risk appetite.

This approach enables a clear distinction between:

1. Linear interest rate risk that can be hedged in the market and transferred to Treasury.

2. Risks that, due to market or strategic constraints, must remain within the business as residual risk.

3. Open positions that are deliberately maintained to benefit from expected market movements.

Benefits of an IRRBB Booking Model

Adopting an IRRBB Booking Model delivers several key benefits for balance sheet management:

• Greater transparency in risk and P&L attribution.

• Governance and overview between IRRBB policies and Treasury’s real hedging capacity.

• Improved decision-making at ALCO level, supported by actionable, management-oriented insights rather than purely regulatory metrics.

• Accountability and cost-benefit analysis on residual risks left on each business unit.

Ultimately, the IRRBB Booking Model enables banks to move from a reactive, compliance-driven approach to interest rate risk towards a strategic, integrated, and business-oriented framework, aligning measurement, hedging, and decision-making under a single operating model.