On 19 July, the European Banking Authority (EBA) has published their final ‘Guidelines on the management of interest rate risk arising from non-trading book activities’. This publication marks the completion of the consultation phase started in October 2017. This long awaited update for the management of Interest Rate Risk in the Banking Book (IRRBB) builds on the original EBA IRRBB guidelines published in May 2015 and the IRRBB Standards published by the Basel Committee on Banking Supervision (BCBS) published in April 2016.
The final EBA IRRBB guidelines are mostly in line with last year’s consultation paper. A number of changes, however, can be observed:
For an overview of the main changes compared to the 2015 EBA IRRBB guidelines we refer to our article on this, published earlier this year.
With the publication of the final EBA IRRBB guidelines, we have not seen the end of regulatory IRRBB requirements. Some elements from the BCBS IRRBB Standards have not yet been included in these guidelines, because the EBA is waiting for the mandate to set up new Regulatory Technical Standards (RTS). This mandate will be included in the upcoming CRR2/CRDV regulations. Both the new CRR2/CRDV regulations and the EBA RTS are expected to take effect as of 2021. It is expected that the EBA RTS will include IRRBB disclosure requirements and the introduction of a new Supervisory Outlier Test (SOT) aimed at Net Interest Income (NII). It is not clear yet to what extent the EBA will prescribe the parameters to be used in the underlying calculations (for example with respect to client behaviour). Changes to the current SOTs (aimed at Economic Value of Equity) are also expected: the current 20% SOT will cease to exist, after which the 15% SOT introduced in the new IRRBB guidelines will be leading. At the moment, it is only considered an early warning signal.
Despite the delayed application date, a timely implementation will prove to be challenging for most banks. Hence, the implementation of the final EBA IRRBB guidelines should be one of the top priorities for each bank.
Should you want to assess your bank’s IRRBB framework, Zanders offers an IRRBB Quick Scan. Based on a review of available model documentation, risk reports and interviews with your bank’s risk specialists, the scan provides an independent and objective assessment of your bank’s IRRBB implementation relative to the new IRRBB principles and best-market practices. More information on the IRRBB Quick Scan can be found here.