Compared to the previous definition, rating/PD migrations are explicitly excluded from CSRBB. Including idiosyncratic spreads could lead to double counting since these are generally covered by a credit risk framework. However, the guidelines give some flexibility to include idiosyncratic spreads, as long as the results are more conservative than when idiosyncratic spreads are excluded. This is because, based on the Quantitative Impact Study of December 2020 (QIS 2020), banks indicated to find it difficult to separate the idiosyncratic spreads from the credit spread.
Also, the scope of CSRBB has changed from the current IRRBB Guidelines. All assets, liabilities and off-balance-sheet items in the banking book that are sensitive to credit spread changes are within the scope of CSRBB whereas the 2018 IRRBB Guidelines focused only on the asset side. Based on the results of the QIS 2020, the EBA concluded that most of the exposures to CSRBB are debt securities which are accounted for at fair value (via Profit and Loss or Other Comprehensive Income). However, this does not rule out that other assets or liabilities could be exposed to CSRBB. It is stated that banks cannot ex-ante exclude positions from the scope of CSRBB. Any potential exclusion of instruments from the scope of CSRBB must be based on the absence of sensitivity to credit spread risk and appropriately documented. At a minimum, banks must include assets accounted at fair value in their scope.
We believe that the obligation to report CSRBB for all assets accounted for at fair value will be challenging for exposures that do not have quoted market prices. Without a deep liquid market, it will be difficult to establish the credits spread risk (even when idiosyncratic risk is included).
Another possible candidate to be included in the scope of CSRBB is the issued funding on the liability side of the banking book, especially in a NII context. When market spreads increase, this could become harmful when the wholesale funding needs to be rolled over against higher credit spread without being able to increase client interest on the asset side. Similar to IRRBB, the exposure to this risk depends on the repricing gap of the assets and liabilities. In this case, however, swaps cannot be used as hedge.
Other products such as consumer loans, mortgages, and consumer deposits, which are typically accounted for at amortized cost, are less likely to be included. This is also stated by the BCBS standards. The BCBS states that the margin (administrative rate) is under absolute control of the bank and hence not impacted by credit spreads. However, it is unclear whether this is sufficient to rule these products out of scope.
Non-satisfactory IRRBB internal systems
The EBA is mandated to specify the criteria for determining an IRRBB internal system as non-satisfactory. The EBA has identified specific items for this that should be considered. At a minimum, banks should have implemented their internal system in compliance with the IRRBB Guidelines, taking into account the principle of proportionality. More specifically:
- Such a system must cover all material interest rate risk components (gap risk, basis risk, option risk).
- The system should capture all material risks for significant assets, liabilities and off-balance sheet type instruments (e.g. non-maturing deposits, loans, and options).
- All estimated parameters must be sufficiently back tested and reviewed, considering the nature, scale and complexity of the bank.
- The internal system must comply with the model governance and the minimum required validation, review and control of IRRBB exposures as detailed by the IRRBB guidelines.
- Competent authorities may require banks to use the standardized approach3 if the internal systems are deemed non-satisfactory.
General update of existing IRRBB Guidelines
Major parts of the guidelines for managing IRRBB have not changed. In the section on IRRBB stress testing, however, a new article (#103) for products with significant repricing restrictions (e.g. an explicit floor on non-maturing deposits – NMDs) is introduced. As part of their stress testing, banks should consider the impact when these products are replaced with contracts with similar characteristics, even under a run-off assumption. The exact intention of this article is unclear. For NII-purposes it is common practice to roll over products with similar characteristics (or use another balance sheet development assumption). Our interpretation of this article is that banks are expected to measure the risk of continued repricing restrictions in an economic value perspective when the maturity of those funding sources is smaller than the maturity of the asset portfolio. This may for example materialize when banks roll over NMDs that are subject to a legally imposed floor.
Another update is the restriction on the maximum weighted average repricing maturity of five years for NMDs. This cap was prescribed for the EVE SOT and is now included for the internal measurement of IRRBB. We believe that the impact of this will be limited since only a few banks will have separate NMD models for internal measurement and the SOT.
Finally, some minor additions have been included in the guidelines. For example, the guidelines emphasize multiple times that when diversification assumptions are used for the measurement of IRRBB, these must be appropriately stressed and validated.
It is expected that the final guidelines will not deviate significantly from the consultation paper. Banks can therefore start preparing for these new expectations. For the measurement of IRRBB, limited changes are introduced in the consultation. Although the exact intention of the EBA is unclear to us, it is interesting to notice that the updated IRRBB Guidelines include the expectation that banks pay special attention in their stress tests to products with significant repricing restrictions. Furthermore, banks must invest in their CSRBB measurement. For their entire banking book, banks need to assess whether market wide credit spread changes will have an impact on an NII and/or economic value perspective. The scope of CSRBB measurement may need to be extended to include the funding issued by the bank. And to conclude, the obligation to measure CSRBB for fair value assets that do not have quoted market prices will be a challenge for banks.
- CP Draft GL on IRRBB and CSRBB.pdf
- CP Draft RTS on SA.pdf
- CP Draft RTS on SOTs.pdf