Document ID: chunk:federal_register_of_legislation:F2024L01182:body:0:p13
Version: federal_register_of_legislation:F2024L01182
Segment Type: other
Provision Reference: 
Character Range: 33641–36543

all non-issuer-specific risk factors for which changes in their values can cause material changes in the economic value of the ADI's market-related items. Where available, different risk factor collections ('curves') must be used for modelling the yields on different types and grades of debt issuers and different payment frequencies.
 1.          An ADI must use an observation period of eight years, which is to be constructed as the concatenation of:
         1.           Period A – fixed observation period (3.5 years), spanning 1 January 2020 to 30 June 2023; and
         2.           Period B – rolling observation period (4.5 years), incorporating the latest data excluding Period A, and ending on a date no earlier than three months before the calculation date.
 2.          The method used to choose the end date of the observation period for each calculation date must be specified. Observation dates are the business days in the observation period. Period B observation dates within the eight-year observation period are to be updated quarterly.

Calculation of the prospective IRRBB capital charge
 1.          The economic value of the banking book or augmented banking book (see paragraph 28 of this Attachment) is the sum of the economic values of all items it contains.
 2.          The economic value (EV) of a banking book item, given a set of repricing assumptions and risk factor values, is:
         1.           for a non-market-related item, the net present value, as at the calculation date, of expected future notional cash flows (see paragraph 24 of this Attachment), using discount rates from the relevant NMR curve; and
         2.           for a market-related item, the fair value of the item, based on the relevant risk factor values.
 1.          For a given repricing assumption , an ADI's prospective IRRBB capital charge is the ADI's estimate of the 97.5 per cent expected shortfall of the prospective loss[6] under repricing assumptions , where, for each possible rate scenario  in the distribution of rate scenarios, the prospective loss is equal to:
is the EV of item  under the central assumptions, using the values of risk factors at the calculation date;
is the EV of item  calculated using repricing assumptions , together with simulated risk factor values obtained by applying to risk factors at the calculation date, a shock determined for rate scenario  in accordance with paragraph 19 of this Attachment;
 is the augmented banking book (see paragraph 28 of this Attachment);
Note that  is a random variable, whereas  is not.
 1.          The distribution of each  must be estimated using a simulation method under which:
         1.           the ADI designates every risk factor to be either perturbed or derived. This designation forms part of the approved IRRBB model, must be documented, and any change to it constitutes a model change;
         2.