Response to consultation on draft ITS on disclosure of information on exposures to interest rate risk on positions not held in the trading book
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For Annex XXXVIII (Table EU IRRBBA) as well as for Template EU IRRBB1, in our view, it is not clear in which cycle these have to be reported to the supervisor. In addition, some details are unclear, which are elaborated in the following points:
Has the free text form for Annex XXXVIII (Table EU IRRBBA) already been finally clarified? Such open questions, some of which are repeated (e.g. both (b) and (f) ask about hedging techniques for interest rate risk), are in great need of support. Sample answers, both in terms of scope and content, are desirable here.
In Annex XXXVIII (Table EU IRRBBA), a description is required in (e) of the different parameters that are used on the one hand for the calculations of the interest rate risk for the template EU IRRBB1 and are used in different ways on the other hand in the internal model for the determination of the interest rate risk. Here, too, we believe that care must be taken to ensure that internal models do not "fall behind" and that internal models are permissible for both the calculation and the disclosure of interest rate risks (in connection with point (2)).
In Template EU IRRBB1, in point 6 in the "Instructions" in both "column a, b" and "column c, d", the disclosure of the change in present value interest rate risk as well as the net interest income is also required for the previous period. This information should already be available to the supervisory authority through earlier reports. The added value of this report is not apparent.
The disclosed net interest income (NII) metrics may not be comparable as long as the EBA has not defined what it understands by these NII metrics. Moreover, it is very likely that future disclosed NII metrics will be based on different other methodologies. Optimally, the methodological requirements for the calculations would first be clarified by the EBA and then the banks would be forced to disclose the calculated results. If this is not feasible, a clarification that banks may use internal metrics for disclosure until further notice would help.
The current chronological order of the published standards shows potential for conflict. We understand the EBA's efforts to create as much clarity as possible for disclosure in a timely manner. However, for understandable reasons, the EBA has not yet defined the requirements under Article 98(5a) CRD to be applied to the metrics to be disclosed. The requirements of the CRR in Art. 448 on the disclosure of exposures to interest rate risk in the banking book have generally been applicable since 28 June 2021. For large capital market-oriented institutions, which are required to disclose their interest rate risk in accordance with Art. 433a in conjunction with Art. 4 No. 146 CRR, disclosure obligations as of 30 June 2021 in connection with interest rate risks in the banking book pursuant to Art. 433a para. 1 (b) (viii) CRR only apply to the information pursuant to Art. 448 para. 1 (a) and (b) CRR.
In Art. 448 para. 1 (b), the disclosure of the quantitative results of the two NII interest rate shocks is expected. Since the EBA has so far neither legally defined what is to be understood by NII in this context in the announced RTS and GL (lack of NII definition), nor has it defined the two NII shock scenarios, we assume that disclosure under Art. 448 (1) (b) CRR is not possible and can thus be omitted. Basel regulations do not represent legally effective requirements for European institutions only in this context. We also refer to Art. 3 para. 3 CRR 2 (last sentence) on entry into force, according to which a disclosure applies from the date of application of the requirement to which the disclosure relates, in this case NII definition, as well as further requirements in this respect.
As of 31 December 2021, the disclosures pursuant to Article 433a (1) (a), (2) (a) and 433c (1) (a) CRR must be disclosed in full. Here, too, it should be noted that due to the lack of legally effective EBA requirements in the announced RTS and GL, the following disclosure requirements cannot be met by this date and can therefore be omitted in our legal opinion: Art 448 for all NII disclosures.
Until the entry into force of the amendments to the disclosure requirements by the present consultation draft or until the entry into force of the announced RTS and GL, there are no further disclosure requirements. In this respect, ESBG strongly opposes the EBA's expectations of institutions to apply the present draft before it enters into force. The institutions must not suffer any disadvantages from a delayed submission of the Level 2 file.
This result of the legal examination also makes economically sense. In this way, it is avoided that, for example, institutions (have to) disclose according to internal NII definitions or internal specifications of NII interest rate shocks, which may no longer be applied after the entry into force of the supervisory specifications and would thus not represent consistent disclosures over time, which in turn would exclude a meaningful interpretation of the risk development over time by external disclosure addressees.
We consider the regulation mentioned here as an "interim solution" to be neither legally possible nor appropriate in terms of content.
In particular, the requirement in Template EU IRRBBA, Row number (e) to disclose "deviations" between modelling and parameter assumptions of the internal risk management systems (IMS) and the assumptions according to Article 98 (5a) CRD does not make sense (supervisory shock results are not a meaningful benchmark for IMS) and is also not possible due to the lack of a supervisory NII definition and the lack of specifications for the NII shocks until the announced RTS and GL come into force.
According to Template EU IRRBB, Row number (b), the "institution's overall IRRBB management and mitigation strategies" should be explained. In addition, the following requirements are formulated: "In particular, institutions shall describe the monitoring of economic value of equity (EVE) and net interest income (NII) in relation to established limits, hedging practices, conduct of stress testing, outcome analysis, the role of independent audit, the role and practices of the asset and liability management committee, the institution's practices to ensure appropriate model validation, and timely updates in response to changing market conditions". These are very far-reaching requirements which in part go beyond the requirements for other risk categories. In our view, such a far-reaching interpretation of the CRR requirements from Article 448 (1) (f) (e.g. on the audit or ALM committee function) cannot be standardised via disclosure requirements.
In this respect, we tend to reject these requirements and consider overarching statements regarding the relationship between the risk management system and the audit to be sufficient to the extent they have been in the past.
As already stated, we do not agree with early disclosure in accordance with Basel regulations. As explained there, Basel regulations are not only not legally effective for European institutions in this context.
In particular, we would reject the requirement of the instructions for Template EU IRRBB1, Column c,d. If institutions make use of their legal option and do not disclose the information required here ("in case they leave these columns blank"), they must not be obliged to explain their reasons for doing so (beyond the legal considerations explained).
Question 1: Are the instructions, table and template clear to the respondents? If not, please provide concrete suggestions to improve them.
As the information required is being disclosed for the first time, ESBG assumes that prior-period disclosures only have to be made from the second disclosure onwards and ask for clarification accordingly.For Annex XXXVIII (Table EU IRRBBA) as well as for Template EU IRRBB1, in our view, it is not clear in which cycle these have to be reported to the supervisor. In addition, some details are unclear, which are elaborated in the following points:
Has the free text form for Annex XXXVIII (Table EU IRRBBA) already been finally clarified? Such open questions, some of which are repeated (e.g. both (b) and (f) ask about hedging techniques for interest rate risk), are in great need of support. Sample answers, both in terms of scope and content, are desirable here.
In Annex XXXVIII (Table EU IRRBBA), a description is required in (e) of the different parameters that are used on the one hand for the calculations of the interest rate risk for the template EU IRRBB1 and are used in different ways on the other hand in the internal model for the determination of the interest rate risk. Here, too, we believe that care must be taken to ensure that internal models do not "fall behind" and that internal models are permissible for both the calculation and the disclosure of interest rate risks (in connection with point (2)).
In Template EU IRRBB1, in point 6 in the "Instructions" in both "column a, b" and "column c, d", the disclosure of the change in present value interest rate risk as well as the net interest income is also required for the previous period. This information should already be available to the supervisory authority through earlier reports. The added value of this report is not apparent.
Question 2: Do the respondents consider the development of these draft ITS based on the current underlying regulation as a sensible and practical approach, given the timing mismatch between the applicability of the disclosure requirements in accordance with Article 448 CRR and the finalisation of the new regulatory framework for IRRBB?
ESBG considers the chosen approach with the details currently provided by the EBA in the draft ITS to be quite problematic.The disclosed net interest income (NII) metrics may not be comparable as long as the EBA has not defined what it understands by these NII metrics. Moreover, it is very likely that future disclosed NII metrics will be based on different other methodologies. Optimally, the methodological requirements for the calculations would first be clarified by the EBA and then the banks would be forced to disclose the calculated results. If this is not feasible, a clarification that banks may use internal metrics for disclosure until further notice would help.
The current chronological order of the published standards shows potential for conflict. We understand the EBA's efforts to create as much clarity as possible for disclosure in a timely manner. However, for understandable reasons, the EBA has not yet defined the requirements under Article 98(5a) CRD to be applied to the metrics to be disclosed. The requirements of the CRR in Art. 448 on the disclosure of exposures to interest rate risk in the banking book have generally been applicable since 28 June 2021. For large capital market-oriented institutions, which are required to disclose their interest rate risk in accordance with Art. 433a in conjunction with Art. 4 No. 146 CRR, disclosure obligations as of 30 June 2021 in connection with interest rate risks in the banking book pursuant to Art. 433a para. 1 (b) (viii) CRR only apply to the information pursuant to Art. 448 para. 1 (a) and (b) CRR.
In Art. 448 para. 1 (b), the disclosure of the quantitative results of the two NII interest rate shocks is expected. Since the EBA has so far neither legally defined what is to be understood by NII in this context in the announced RTS and GL (lack of NII definition), nor has it defined the two NII shock scenarios, we assume that disclosure under Art. 448 (1) (b) CRR is not possible and can thus be omitted. Basel regulations do not represent legally effective requirements for European institutions only in this context. We also refer to Art. 3 para. 3 CRR 2 (last sentence) on entry into force, according to which a disclosure applies from the date of application of the requirement to which the disclosure relates, in this case NII definition, as well as further requirements in this respect.
As of 31 December 2021, the disclosures pursuant to Article 433a (1) (a), (2) (a) and 433c (1) (a) CRR must be disclosed in full. Here, too, it should be noted that due to the lack of legally effective EBA requirements in the announced RTS and GL, the following disclosure requirements cannot be met by this date and can therefore be omitted in our legal opinion: Art 448 for all NII disclosures.
Until the entry into force of the amendments to the disclosure requirements by the present consultation draft or until the entry into force of the announced RTS and GL, there are no further disclosure requirements. In this respect, ESBG strongly opposes the EBA's expectations of institutions to apply the present draft before it enters into force. The institutions must not suffer any disadvantages from a delayed submission of the Level 2 file.
This result of the legal examination also makes economically sense. In this way, it is avoided that, for example, institutions (have to) disclose according to internal NII definitions or internal specifications of NII interest rate shocks, which may no longer be applied after the entry into force of the supervisory specifications and would thus not represent consistent disclosures over time, which in turn would exclude a meaningful interpretation of the risk development over time by external disclosure addressees.
We consider the regulation mentioned here as an "interim solution" to be neither legally possible nor appropriate in terms of content.
In particular, the requirement in Template EU IRRBBA, Row number (e) to disclose "deviations" between modelling and parameter assumptions of the internal risk management systems (IMS) and the assumptions according to Article 98 (5a) CRD does not make sense (supervisory shock results are not a meaningful benchmark for IMS) and is also not possible due to the lack of a supervisory NII definition and the lack of specifications for the NII shocks until the announced RTS and GL come into force.
According to Template EU IRRBB, Row number (b), the "institution's overall IRRBB management and mitigation strategies" should be explained. In addition, the following requirements are formulated: "In particular, institutions shall describe the monitoring of economic value of equity (EVE) and net interest income (NII) in relation to established limits, hedging practices, conduct of stress testing, outcome analysis, the role of independent audit, the role and practices of the asset and liability management committee, the institution's practices to ensure appropriate model validation, and timely updates in response to changing market conditions". These are very far-reaching requirements which in part go beyond the requirements for other risk categories. In our view, such a far-reaching interpretation of the CRR requirements from Article 448 (1) (f) (e.g. on the audit or ALM committee function) cannot be standardised via disclosure requirements.
In this respect, we tend to reject these requirements and consider overarching statements regarding the relationship between the risk management system and the audit to be sufficient to the extent they have been in the past.
Question 3: Regarding template EU IRRBB1, do the respondents agree on disclosing the changes in the net interest income under the two supervisory shock scenarios of parallel up and down, in line with the Basel disclosure template, and on the interim solution proposed in the instructions to columns c, d of this template until the underlying regulatory framework on IRRBB is not yet finalised?
As described above, we do not believe that it does not help banks, supervisors and the public to build processes around a risk metric that is not yet defined. ESBG instead proposes to further delay the disclosure of NII risk measures until the EBA requirements for these NII risk measures are specified.As already stated, we do not agree with early disclosure in accordance with Basel regulations. As explained there, Basel regulations are not only not legally effective for European institutions in this context.
In particular, we would reject the requirement of the instructions for Template EU IRRBB1, Column c,d. If institutions make use of their legal option and do not disclose the information required here ("in case they leave these columns blank"), they must not be obliged to explain their reasons for doing so (beyond the legal considerations explained).