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Final set of guidelines and standards on interest rate risk arising from non-trading book activities by EBA

On 20 October 2022, the European Banking Authority (EBA) released its final guidelines and a package of two final draft Regulatory Technical Standards (RTS) outlining the technical aspects of the revised framework for capturing interest rate risks for banking book (IRRBB) positions.

Rising to prominence due to the current interest rate environment, these are one of the crucial final steps in onboarding Basel standards on IRRBB into EU law. As such, EBA will closely monitor the implementation of these measures and the effects of changing interest rates on European institutions' management of IRRBB and other prudential aspects.

Guidelines on IRRBB and Credit Spread Risk arising from non-trading book activities (CSRBB)

As a way to provide continuity to the current guidelines on technical aspects of the management of IRRBB under the supervisory review process (SREP) published in 2018, the updated guidelines on IRRBB and CSRBB include new components, such as criteria for identifying unsatisfactory internal management models for IRRBB, as well as measures to assess and monitor CSRBB.

Specific elements of the guidelines will be closely examined by the EBA, such as the 5-year repricing maturity cap of non-maturity deposits, to assess potential unintended and undesirable effects, as well as the repricing methods used in different products and business lines. The guidelines will come into effect as of 30 June 2023, except for the section on CSRBB, which will be effective from 31 December 2023.

Final Draft RTS on the IRRBB Standardized Approach

Detailed criteria are provided in the final draft RTS on the IRRBB standardized approach that help evaluate the risks associated with potential changes in interest rates. Such alterations have the capacity to affect not only the economic value of equity (EVE) but also the net interest income (NII) of non-trading book activities. Smaller and non-complex institutions will also benefit from a simplified, standardized approach. Adapted thresholds for modeling behavioral assumptions, used along with standardized constraints and assumptions, are included in the final draft of the RTS to ensure more proportionality. The EBA will scrutinize the calibration of these thresholds in the future.


Final Draft RTS on IRRBB Supervisory Outlier Tests (SOT)

As part of the final draft IRRBB supervisory outlier tests (SOT), model and parametric assumptions, as well as supervisory shock scenarios, are specified to identify institutions for which EVE would decrease more than 15% of Tier 1 capital and assess if net interest income has declined significantly, which could trigger supervisory measures. Specific aspects, such as the recalibrated lower bound in the SOT, will be closely monitored by EBA.

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