CEBS publishes final technical guidance on application of the supervisory review process in relation to interest rate risk in the banking book

The Committee of European Banking Supervisors (CEBS) is today publishing additional technical guidance on application of the supervisory review process under the Capital Requirements Directive.
The technical guidance complements CEBS guidelines on the Supervisory Review Process issued in January 2006. The supervisory review process is designed to enhance the link between the risks taken on by institutions, the management of those risks, and the capital they hold against them. The cornerstone of the supervisory review process will be a structured dialogue between institutions and supervisors when reviewing and evaluating the institution's risk profile and capital needs.

In particular, in relation to interest rate risk in the banking book, CEBS proposes common high level guidance on how the interest rate risks could be measured and managed by institutions and assessed by supervisors.
CEBS has developed the guidelines after publicly consulting market participants. The consultation which ended on 23 June 2006 generated 11 responses which are all publicly available.
The responses generally supported CEBS' work in fostering convergence but they also criticised the proposed guidelines as being too detailed and prescriptive.

CEBS has analysed the feedback and has reflected them in the guidelines. In particular, it has been clarified that it is indeed the full responsibility of the institution to choose, apply, and monitor their internal methodologies for risk assessment and management. Moreover, the standard shock required by the Capital Requirements Directive and as elaborated upon in the CEBS guidance should not be interpreted as requiring only a single measure of interest rate risk. Irrespective of its level what is important is that supervisors apply a common standard shock which is calculated in a consistent and comparable manner. European coordination and cooperation– especially for cross border banking groups – will be important. There is also a commitment of national competent authorities to keep this standard shock under review in light of experience.

CEBS is currently revisiting its technical guidance on Concentration risk (second part of its 11th Consultation Paper) in light of the results of its survey of market practices with regard to the measurement and management of large exposures and other concentration risks.