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The EBA publishes their final IRRBB guidelines

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:

• The application date has been postponed from 31 December 2018 to 30 June 2019. Hence, a bank’s ICAAP report published in 2020 should reflect the new guidelines. The transitional arrangements for SREP 3 and 4 institutions have also been postponed six months (from 30 June 2019 to 31 December 2019). This delay does not come as a surprise given the limited time left relative to the original application date.
• Additional detail has been added to the definition of Credit Spread Risk from non-trading activities (CSRBB) and it is clarified that this refers to the asset side of the non-trading book.
• The definition of ‘core’ balances in customer accounts without specific repricing dates has been aligned with the definition introduced in the BCBS standards. Furthermore, some details have been added on segmentation in modelling of these deposits between retail/wholesale and transactional/non-transactional.
• For the calculation of the SOT, the consultation paper specified that no diversification effects are allowed between currencies. The final IRRBB guidelines introduce a fixed diversification factor of 50% for positive effects (within the same interest rate scenario).
• Again for the calculation of the SOT, the level of the floor has been adjusted upwards. In the consultation paper, the floor ran (linearly) from -150 basis points (bps) at the overnight (O/N) rate to 0 bps at the 30 year point. In the final IRRBB guidelines, the floor runs from -100 bps at the O/N rate to 0 bps at the 20 year point.

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.

Get in touch with Sjoerd Blijlevens or Erik Vijlbrief for more information about IRRBB.