EBA Proposes Standards on Interest Rate Risk in the Banking Book
The European Banking Authority (EBA) launched three consultations on technical aspects of the revised framework capturing interest rate risks for banking book (IRRBB) positions, with the comment period ending on April 04, 2022. The proposals pertain to the draft regulatory technical standards on the IRRBB standardized approach; the draft guidelines on IRRBB and credit spread risk arising from non-trading book activities (CSRBB); and the draft regulatory technical standards on the IRRBB supervisory outlier test. These draft regulatory technical standards and guidelines have been developed on the basis of Article 84(5), 84(6), and 98(5a) of the Capital Requirements Directive or CRD.
The regulatory technical standards on the IRRBB standardized approach specify criteria for the evaluation of IRRBB in case a competent authority decides its application in view of a non-satisfactory IRRBB internal system. The proposed draft regulatory standards specify standardized and simplified standardized methodologies to evaluate the risks arising from potential changes in interest rates that affect both the economic value of equity and the net interest income of an institution’s non-trading book activities in accordance with 84(5) of the Capital Requirements Directive (2013/36/EU). The simplified standardized approach reflects the generally less advanced capacities of smaller and non-complex institutions. To harmonize the calculation, EBA has specified common definitions, components, and steps for institutions to apply, which lead to estimates comparing the economic value of equity and net interest income between a baseline scenario and an interest rate shock scenario. Three main components are identified to estimate the level of net interest income within a given horizon: the aggregation of interest rate payments that are already fixed, the projection of risk-free yield, and the projection of commercial margin for repricing cash flows. To project risk-free yield with appropriate forward rates, additional slotting is needed based on original maturity. Additional components take into account automatic optionality and basis risk. Where possible, these proposals are based on the standardized methodology published by the Basel Committee on Banking Supervision in April 2016 as well as the practices established in the EBA Guidelines (EBA/GL/2018/02) on the management of interest rate risk arising from non-trading book activities from July 18, 2018.
The guidelines on IRRBB and CSRBB will replace the current guidelines on technical aspects of the management of interest rate risk arising from non-trading activities under the supervisory review process published in 2018. The updated guidelines provide continuity to the current ones and include new aspects of the mandate. In particular, they specify the criteria to identify non-satisfactory internal models for IRRBB management and identify specific criteria to assess and monitor CSRBB. The draft guidelines specify aspects of the identification, evaluation, management and mitigation of the risks arising from potential changes in interest rates and of the assessment and monitoring of credit spread risk, of institutions’ non-trading book activities. EBA is mandated to specify in these guidelines additional criteria for the assessment and monitoring by institutions of their credit spread risk arising from their non-trading book activities (CSRBB). The draft guidelines provide a definition and the scope of application of CSRBB. They contain dedicated sections for CSRBB with specific provisions on the identification, assessment, and monitoring of CSRBB. Finally, the amended mandate requests the inclusion of criteria for determining whether the internal systems implemented by institutions for the purpose of evaluating IRRBB are not satisfactory, in which case a competent authority may require an institution to use the standardized methodology. After some general provisions, the new guidelines contain separate specific chapters for IRRBB and for CSRBB. The guidelines are broadly consistent with the Basel standards with some further elaborated sections following the Capital Requirements Directive mandate, particularly on CSRBB assessment and monitoring and non-satisfactory IRRBB internal systems.
The regulatory technical standards on IRRBB supervisory outlier tests specify the supervisory shock scenarios as well as the criteria to evaluate if there is a large decline in the net interest income or in the economic value of equity that could trigger supervisory measures. The draft standards take into account the current low interest rate environment, for example, in the determination of a post-shock interest rate floor. The draft regulatory standards specify supervisory shock scenarios, common modeling and parametric assumptions, and what constitutes a large decline for the calculation of the economic value of equity and of the net interest income in accordance with Article 98(5a) of the Capital Requirements Directive, In the Directive, a supervisory outlier test is envisaged to identify institutions of which, in the context of a shock scenario, the economic value of equity declines by more than 15% of their Tier 1 capital or their net interest income experiences a large decline. If any of these limits are breached, competent authorities, unless they consider notwithstanding the breach that the institution’s IRRBB management is adequate and that it is not excessively exposed to IRRBB, shall exercise their supervisory powers like setting additional own funds requirements, limitations of activities with excessive risks, specifying modeling and parametric assumptions, among others established in the Directive. As per its mandate the draft regulatory technical standards are inspired on the internationally agreed Basel standards.
Related Links
- Press Release
- Proposed Standardized Approach (PDF)
- Proposed Guidelines on IRRBB and CSRBB (PDF)
- Proposal on Outlier Tests (PDF)
Comment Due Date: April 04, 2022
Keywords: Europe, EU, Banking, Basel, Standardized Approach, Regulatory Technical Standards, Regulatory Capital, IRRBB, Interest Rate Risk, CSRBB, Supervisory Outlier Tests, Shock Scenarios, Simplified Standardized Approach, CRD, EBA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.