Response to consultation on draft RTS on IRRBB supervisory outlier tests
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The behavioral assumptions should align the with internal management system (IMS) behavioural assumptions without limitations (e.g. no caps on NMD’s) so that the interest rate risk is adequately measured. It is essential to avoid uneconomic interest rate risk measurement and management that would be driven to satisfy either one or the two SOT.
• the CP envisages to apply two supervisory parallel shock scenarios for SOT NII that apply instantaneously with magnitudes that are not consistent with facts. In developed countries, Central Banks carefully modify their interest rates over time with managing market expectations to avoid triggering market surprises. Hence, their expected changes are factored in the interest rate curve well before the changes actually occur. As shocks apply on top of those expected changes, the shocks should be adapted.
To better fit reality, it would make better sense to assume that the shocks are applied gradually over the considered 12 months horizon. Conscious of the operational complexities that banks may be confronted with such a gradual scenario, we recommend a more pragmatic solution by adopting a lower magnitude for the elected instantaneous shock.
The magnitude of the two SOT NII supervisory parallel shock scenarios should be made more consistent with facts and its immediate application: a ±100 basis points (bps) for most developed currencies (e.g. EUR, USD) would be more relevant (vs. the envisaged ±200 bps).
• As regards the proposed recalibration of the lower bound, to be applied to post-shock interest rate levels, we do not see the need for such change. For the SOT on NII this lower bound is mainly determined by policies of the central banks. Nowadays this is large consensus that setting a policy rate below -/- 100 bps is ineffective. Therefore, the recalibrated lower bound seems rather unrealistic. Thus, we do not support the proposed change in the lower bound. Should nonetheless the lower bound be changed, this should be factored in the calibration of the threshold.
NII should be kept as defined by interest income and expenses.
• The CP that SOT NII is suggested to be calculated with a constant balance sheet.
It should be clarified that within this constant balance sheet requirement, Internal Management System (IMS) assumptions, such as behavioural assumptions, apply.
To the extent that a dynamic balance approach would be used in IMS, notably when the dynamic balance sheet enables to capture behavioural assumptions that excluded from the scope of common parametric assumptions, we believe that a discretion should be provided for the bank and the competent authority to use dynamic balance sheet for SOT NII. As public disclosures requirements are based on SOT NII assumptions (which is a deviation from BCBS Standard), such a discretion would enable consistency with actual management.
• For the definition of large decline threshold for SOT NII:
o Option B appears to benefit from a denominator that is in direct relation with the numerator. However, the introduction of non-NII related components make it complex and variable for no NII-reasons.
o Option A appears as simpler and less prone to variability and pro-cyclicality, though Tier One does not directly relate to NII generation.
o Whichever option is finally determined, we notice that a large decline in itself is no reason to impose supervisory measures. It is very well possible that even if a bank encounters a large decline the resulting NII is still largely positive (in particular if interest rate levels return to normalized levels). Furthermore, banks factor in this risk as part of business risk under Pillar 2. Imposing supervisory measures thus may lead to double counting.
o The value of large decline should not be defined yet as it requires further analyses to make sure it is relevant and consistent through time (i.e. not point in time), across scope of application (i.e. individual and consolidated level). We have strong concerns on the methodology that is envisaged by EBA to set this large decline threshold as it is not risk based.
Further analyses should be developed over time before electing a specific ratio and its accompanying large decline thresholds.
o As regards the proposed recalibration of the lower bound, to be applied to post-shock interest rate levels, we do not see the need for such change. For the SOT on NII this lower bound is mainly determined by policies of the central banks. Nowadays this is large consensus that setting a policy rate below -/- 100 bps is ineffective. Therefore, the recalibrated lower bound seems rather unrealistic and we do not support the proposed change in the lower bound. Should nonetheless the lower bound be changed, this should be factored in the calibration of the threshold. The CP should clarify that as EVE and NII sensitivities cannot be simultaneously reduced, the analysis of SOT EVE and SOT NII needs to be done in combination by competent authority.
The CP should clarify that the SOTs serve as an indication for competent authorities only, as explicitly stated in article 98.5 of the CRD5. In that sense
• no automatic supervisory measures should apply in case of crossing SOT’s thresholds There should be no direct link between the SOT’s and the identification of internal capital that may be identified for IRRBB.
• no full integration of SOTs into the internal measurement and/ or management should be required.
• no (Pillar 3) disclosure obligation should be applied.
Respondents are also kindly requested to express whether they find an inclusion of market value changes in the calculation of the NII SOT clear enough.
• to be aligned with the CRD mandate, the draft RTS should explicitly mention that the common modelling and parametric assumptions exclude behavioural assumptions and should apply only to the calculation of SOT’s.The behavioral assumptions should align the with internal management system (IMS) behavioural assumptions without limitations (e.g. no caps on NMD’s) so that the interest rate risk is adequately measured. It is essential to avoid uneconomic interest rate risk measurement and management that would be driven to satisfy either one or the two SOT.
• the CP envisages to apply two supervisory parallel shock scenarios for SOT NII that apply instantaneously with magnitudes that are not consistent with facts. In developed countries, Central Banks carefully modify their interest rates over time with managing market expectations to avoid triggering market surprises. Hence, their expected changes are factored in the interest rate curve well before the changes actually occur. As shocks apply on top of those expected changes, the shocks should be adapted.
To better fit reality, it would make better sense to assume that the shocks are applied gradually over the considered 12 months horizon. Conscious of the operational complexities that banks may be confronted with such a gradual scenario, we recommend a more pragmatic solution by adopting a lower magnitude for the elected instantaneous shock.
The magnitude of the two SOT NII supervisory parallel shock scenarios should be made more consistent with facts and its immediate application: a ±100 basis points (bps) for most developed currencies (e.g. EUR, USD) would be more relevant (vs. the envisaged ±200 bps).
• As regards the proposed recalibration of the lower bound, to be applied to post-shock interest rate levels, we do not see the need for such change. For the SOT on NII this lower bound is mainly determined by policies of the central banks. Nowadays this is large consensus that setting a policy rate below -/- 100 bps is ineffective. Therefore, the recalibrated lower bound seems rather unrealistic. Thus, we do not support the proposed change in the lower bound. Should nonetheless the lower bound be changed, this should be factored in the calibration of the threshold.
Question 2: Do respondents have any comment related to these two metrics for the specification and the calibration of the test statistic for the large decline in Article 6 for the purpose of NII SOT? Specifically, do respondents find the inclusion of administrative expenses in metric 2 clear enough? Do respondents have any comment on the example on currency aggregation for metric 1 and metric 2?
• the CP envisages to change the definition of commonly understood Net Interest Income (NII) to include changes in fair values of instruments even though they are not part of NII. This appears as a deviation from the CRR mandate that explicitly refers to NII. It also deviates from Basel Committee on Banking Supervision (BCBS) Standard that is quite explicit that it refers to NII excluding changes in fair values that do not affect NII. This would also be at odds with actual risk management and would introduce overlapping between NII measures and Economic Value (EV) measures, such as SOT EVE and SOT NII, while they should be complementary.NII should be kept as defined by interest income and expenses.
• The CP that SOT NII is suggested to be calculated with a constant balance sheet.
It should be clarified that within this constant balance sheet requirement, Internal Management System (IMS) assumptions, such as behavioural assumptions, apply.
To the extent that a dynamic balance approach would be used in IMS, notably when the dynamic balance sheet enables to capture behavioural assumptions that excluded from the scope of common parametric assumptions, we believe that a discretion should be provided for the bank and the competent authority to use dynamic balance sheet for SOT NII. As public disclosures requirements are based on SOT NII assumptions (which is a deviation from BCBS Standard), such a discretion would enable consistency with actual management.
• For the definition of large decline threshold for SOT NII:
o Option B appears to benefit from a denominator that is in direct relation with the numerator. However, the introduction of non-NII related components make it complex and variable for no NII-reasons.
o Option A appears as simpler and less prone to variability and pro-cyclicality, though Tier One does not directly relate to NII generation.
o Whichever option is finally determined, we notice that a large decline in itself is no reason to impose supervisory measures. It is very well possible that even if a bank encounters a large decline the resulting NII is still largely positive (in particular if interest rate levels return to normalized levels). Furthermore, banks factor in this risk as part of business risk under Pillar 2. Imposing supervisory measures thus may lead to double counting.
o The value of large decline should not be defined yet as it requires further analyses to make sure it is relevant and consistent through time (i.e. not point in time), across scope of application (i.e. individual and consolidated level). We have strong concerns on the methodology that is envisaged by EBA to set this large decline threshold as it is not risk based.
Further analyses should be developed over time before electing a specific ratio and its accompanying large decline thresholds.
o As regards the proposed recalibration of the lower bound, to be applied to post-shock interest rate levels, we do not see the need for such change. For the SOT on NII this lower bound is mainly determined by policies of the central banks. Nowadays this is large consensus that setting a policy rate below -/- 100 bps is ineffective. Therefore, the recalibrated lower bound seems rather unrealistic and we do not support the proposed change in the lower bound. Should nonetheless the lower bound be changed, this should be factored in the calibration of the threshold. The CP should clarify that as EVE and NII sensitivities cannot be simultaneously reduced, the analysis of SOT EVE and SOT NII needs to be done in combination by competent authority.
The CP should clarify that the SOTs serve as an indication for competent authorities only, as explicitly stated in article 98.5 of the CRD5. In that sense
• no automatic supervisory measures should apply in case of crossing SOT’s thresholds There should be no direct link between the SOT’s and the identification of internal capital that may be identified for IRRBB.
• no full integration of SOTs into the internal measurement and/ or management should be required.
• no (Pillar 3) disclosure obligation should be applied.