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October 09, 2017

ECB had conducted a sensitivity analysis of interest rate risk in the banking book (IRRBB) based on year-end 2016 numbers. The results show that higher interest rates would lead to higher net interest income in the next three years for a majority of banks. Supervisors will follow up on the results in supervisory dialogs with the individual banks.

The results show that a hypothetical increase in interest rates of 200 basis points would lead on aggregate to a rise in net interest income of 4.1% in 2017 and of 10.5% by 2019, while the economic value of equity would decrease on aggregate by 2.7%. These projections are strongly influenced by the assumptions banks make about customer behavior. The supervisors gained fresh and substantial insights into how the institutions they supervise manage interest rate risk and will discuss the conclusions individually with the banks during the supervisory dialog. The stress test also illustrated how banks use interest rate derivatives for hedging risk exposures and reaching a target interest rate profile and how they adopt quite a diverse “positioning” toward future interest rates movement. Where relevant, this will also be part of the supervisory dialog with individual banks.

ECB Banking Supervision applied six hypothetical interest rate shocks to determine how the economic value of equity and net interest income projections would change in an evolving interest rate environment. The six shocks drew on the shock scenarios set by BCBS and captured changes in the level and shape of the interest rate curve. Results are being used by Joint Supervisory Teams in the Supervisory Review and Evaluation Processes (SREP), among other factors to adjust the level of Pillar 2 Guidance. The results were also used in the yearly assessment of the banks’ overall capital demand.


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Keywords: Europe, EU, Banking, IRRBB, Stress Test, SREP, Hedging Risk Exposure, Supervisory Dialog, ECB

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