Credit Spread Risk in the Banking Book: EBF position

EBF adviser: Saif Chaibi 

Publication date: 31 January 2018

Key points (summarised):
kkk

1.  The European Banking Authority (EBA) should not front run the European process

While we agree that qualitative aspects of the Basel Committee on Banking Supervision (BCBS) Standards n°368 on Interest Rate Risk in the Banking Book (IRRBB) could be factored in EBA Guidelines, we believe such Guidelines should not factor in any quantitative components while they are being discussed by the European legislators. EBF strongly recommends EBA to wait and not front run the ongoing European legislation process for the adoption of the level 1 text (Capital Requirement Directive #5 and Capital Requirement Regulation #2).

EBF urges EBA to launch QIS’s to consider whether the envisaged new requirement should apply to consolidated level only, or, in addition, to individual European Union (EU) Credit Institutions not subject to capital derogations as defined in Article 7 of Capital Requirement Regulation (EU) n° 575/2013.

We recommend the introduction of any new requirements as contingent on similar implementations in major supervisory jurisdictions.

2.  Some components of the draft Guidelines are irrelevant

The Credit Spread Risk in the Banking Book (CSRBB) is not only vaguely defined as ‘any kind of spread risk of interest rate sensitive instruments that is not IRRBB or credit risk’, but it simply does not relate to IRRBB. For both reasons, EBF urges to delete reference to CSRBB on IRRBB Guidelines.

3.  Some components of the draft Guidelines should be clarified

The draft Guidelines should distinguish the recommendations that apply to ‘IRRBB considered in isolation’ from those that apply to ‘IRRBB as contribution to a broader framework’:

As for internal capital for IRRBB, we welcome the clarification that there is a need to hold internal capital for IRRBB to the extent that there is a risk of loss (§30(c)&(e)).This would be even clearer if this was described as a general principle, and explicitly mentioned in the economic value component.

4. Some components of the draft Guidelines should be simplified

• The six interest rate shocks to use for the SOT are unnecessarily burdensome and do not add value to this tool compared to the current situations in which two parallel up/down scenarios are envisaged.
• The requirement to define ‘the risk appetite statement for IRRBB should be expressed in terms of the maximum acceptable short term and long term impact of fluctuating interest rates on both earnings and economic value’ is not only not clear (the articulation between short term and long term on one side, and earnings and economic value on the other side is not clear), but is also overly prescriptive. This should be simplified into ‘the risk appetite statement for IRRBB should be expressed in terms of both earnings and economic value’.
• The requirement to identify internal capital for IRRBB on economic value and earnings is a source of complexity as it requires articulating the two components to ensure that there is no double counting.

4.  Effective Date

Banks will need a year to implement the Guidelines after the release of the final version.