Next step for regulatory IRRBB framework: disclosure requirements

Next step for regulatory IRRBB framework: disclosure requirements

With the publication of the draft implementing technical standards on disclosure requirements for Interest Rate Risk in the Banking Book (IRRBB), the European Banking Authority (EBA) has taken another step in completing the regulatory IRRBB framework. The standards include both a qualitative and a quantitative template.

Even though the disclosure requirements are relatively limited and much of the required information will already be available, banks still have to figure out what level of detail they need to share in their Pillar 3 reports. Furthermore, banks are faced with a relatively inefficient process as they will need to adapt their disclosures on net interest income once new regulatory technical standards are published in Q1 of 2022.

Regulatory background

The EBA published the draft implementing technical standards (ITS) on disclosure requirements for IRRBB on 10 November 2021. This is part of the translation of the BCBS IRRBB Standards, published in April 2016, into European legislation. As a first step, the EBA published an update of their IRRBB Guidelines in 2018, but these did not cover disclosure requirements. Next, the Council of the EU and the European Parliament adopted the revised Capital Requirements Regulation (CRR2) and Capital Requirements Directive (CRD5) in 2019 as part of the Risk Reduction Measures package. Article 448 of the CRR2 introduced the requirement for banks to disclose both qualitative and quantitative information on IRRBB starting from 28 June 2021. It also included various mandates for the EBA to come up with new or adjusted technical standards and guidelines, among which the mandate to “draft implementing technical standards specifying uniform disclosure formats”.

Timing mismatch

The EBA’s intention was to align the timing of the ITS on IRRBB disclosures with the expected update of its IRRBB Guidelines. When it became clear that the EBA had to postpone that update from June 2021 to 2022Q1, among others due to the COVID-19 pandemic, they decided to go ahead with the IRRBB disclosure requirements. Their main argument is that they want to support banks to comply with the CRR2 requirement to disclose information about their IRRBB. They argue that they prepared the reporting templates in line with the disclosure requirements detailed in the BCBS IRRBB Standards to minimize any future changes following from the upcoming (but delayed) update of the EBA IRRBB Guidelines.

Disclosure requirements

The quantitative disclosures required from banks, contained in template EU IRRBB1 (see Table 1), are relatively limited. It will come as no surprise that banks need to disclose the changes in Economic Value of Equity (EVE) for the six standard supervisory shock scenarios, in line with the existing supervisory outlier test. Further, the reporting template reflects the expected introduction of a supervisory outlier test for Net Interest Income (NII) as banks need to disclose the impact of the two standard supervisory parallel shock scenarios for this metric as well.

Table 1 – Overview of information required for EBA template EU IRRBB1

Since the EBA still needs to deliver on their mandate to develop regulatory technical standards (RTS) detailing “the common modelling and parametric assumptions […] that institutions shall reflect in their calculations of the net interest income”, the EBA asks banks to “use their internal NII risk metrics, if available, and provide complementary information on their calculations” in the template for their qualitative IRRBB disclosure.

The qualitative disclosure requirements, contained in template EU IRRBBA (see Table 2), consist of ten topics describing a bank’s management of IRRBB. The first topics require banks to describe how they define, measure, mitigate and control their IRRBB. They not only need to describe their overall risk management and mitigation strategies in general terms, but also on a more detailed level. For example, banks do need to explain which scenarios are used, introduce their key modelling and parametric assumptions (except for those that are specified by the EBA), detail the effect of their hedges on the risk numbers, and report the average and longest repricing maturity assigned to non-maturity deposits. Any significant changes to the risk measures compared to previous reporting periods also need to be explained (with an obvious exemption for the first reporting period).

Table 2 – Overview of information required for EBA template EU IRRBBA

The frequency for the IRRBB disclosures depends on the type of financial institution. Small and non-complex institutions are exempted from the IRRBB disclosure requirements. Large institutions, on the other hand, need to disclose the qualitative information on an annual basis, and the quantitative information on a semi-annual basis.

Conclusion

In the past years, many banks have invested heavily in their IRRBB frameworks following the 2018 update of the EBA’s IRRBB Guidelines. Once again, work is needed. Even though the disclosure requirements are relatively limited and much of the required information will already be available, banks have to figure out what level of detail they need to share in their Pillar 3 reports. Even though the EBA published some guidance on the way banks need to complete the qualitative template, most of it only mentions the type of topics that need to be covered without being prescriptive. It remains to be seen if this results in the “sufficiently comprehensive and comparable information” the EBA is aiming for.

Banks are further faced with a relatively inefficient process. The next couple of reporting periods banks need to base reporting on their internal NII measurement. After the update of the EBA IRRBB Guidelines (expected in 2022Q1), banks will need to adapt their NII disclosures to meet the EBA requirements on modelling and parametric assumptions and prepare for a new supervisory outlier test for NII. Consequently, the disclosure requirements will take a substantial time to implement after all. The comparability of the quantitative information will improve by this step though.

References
1) EBA’s Draft implementing technical standards amending Implementing Regulation (EU) No 637/2021 on disclosure of information on exposures to interest rate risk on positions not held in the trading book in accordance with Article 448 of Regulation (EU) No 575/2013 – link.
2) The Basel Committee on Banking Supervision Standards on interest rate risk in the banking book in full.
3) EBA’s Guidelines on the management of interest rate risk arising from non-trading book activities – link.
4) As specified in article 434a of the CRR2 (i.e., Regulation (EU) No 876/2019).
5) As specified in article 98(5a) of the CRR2.
6) As defined in article 4(145) of the CRR2.