European committee accepts NII SOT while EBA published its roadmap for IRRBB

The European Committee (EC) has approved the regulatory technical standards (RTS) that include the specification of the Net Interest Income (NII) Supervisory Outlier Test (SOT). The SOT limit for the decrease in NII is set at 5% of Tier 1 capital. Since the three-month scrutiny period has ended it is expected that the final RTS will be published soon. 20 days after the publication the RTS will go into force. The acceptance of the NII SOT took longer than expected among others due to heavy pushback from the banking sector.  The SOT, and the fact that some banks rely heavily on it for their internal limit framework is also one of the key topics on the heatmap IRRBB published by the European Banking Authority (EBA). The heatmap detailing its scrutiny plans for implementing interest rate risk in the banking book (IRRBB) standards across the EU. In the short to medium term (2024/Mid-2025), the focus is on

• The EBA has noted that some banks use the as an internal limit without identifying other internal limits. The EBA will explore the development of complementary indicators useful for SREP purposes and supervisory stress testing.
• The different practices on behavioral modelling of NMDs reported by the institutions.
• The variety of hedging strategies that institutions have implemented.
• Contribute to the Dynamic Risk Management project of the International Accounting Standards Board (IASB), which will replace the macro hedge accounting standard.

In the medium to long-term objectives (beyond mid-2025) the EBA mentions it will monitor the five-year cap on NMDs and CSRBB definition used by banks. No mention is made by the EBA on the consultation started by the Basel Committee on Banking Supervision, on the newly calibrated interest rate scenarios methodology and levels. In the coming weeks, Zanders will publish a series of articles on the Dynamic Risk Management project of the IASB and what implications it will have for banks. Please contact us if you have any questions on this topic or others such as NMD modelling or the internal limit framework/ risk appetite statements.