Response to consultation on the ITS on Supervisory Reporting with regard to IRRBB reporting
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But questions remain regarding specific aspects of NII/EVE simulation. For example, there is no clear definition as to whether revenues from investment fund (CIU) positions must be broken down and reported separately in debt securities and derivatives, or if the interest-related components should be reported as a whole in “other”.
Furthermore, the question arises as to how the statutory termination option could be mapped in the case of a 10-year fixed interest rate. Additionally, the mapping of loan commitments is not clear, e. g. the split between short and long positions.
• the breakdown structure (J 02.00, J 03.00, J 04.00) differs from actual risk management implementation, which is based on individually defined balance sheet structures. Additional data must be (pre-)processed, and a new COREP segmentation view will have to be established. It is not clear whether all relevant data is available in the core banking and reporting systems.
• a detailed split of NII/EVE into contractual and optional components for all relevant products/contracts
• add-on behavioural modelling, time series approaches, automatic optionalities
• new split of derivatives into long/short, interest and currency positions (legs), and segmentation in the corresponding asset/liability structures
• implementation rules for hedge accounting (as required under treatment of derivatives and definition of NII)
These are only some particularly eye-catching examples. It is very likely that there are many more. Implementation requirements for each institution under the available software applications will lead to a very challenging – if at all possible – effort to map the current product structure, which is individually chosen by each institution, to fulfil the stated reporting structure requirements. Supporting information from central IT services and other product service providers will require an equally challenging effort to incorporate these individually chosen product structures.
The suggested reporting requirements include a level of detail that is not common among SNCIs and not used in managing interest rate risk. Therefore, even with the suggested simplification, the resulting reporting requirements are still a tremendous effort and burden for SNCIs, which run counter to efforts to promote proportionality (see EBA’s Cost of Compliance study).
Moreover, there should be a proportionate approach for the group of “other institutions” as well, in particular concerning the (granularity of) breakdowns.
A phase-in approach for all templates with breakdowns should also be considered. We also suggest additional simplifications for banks that do not significantly rely on liabilities with optional or variable features.
Regarding the information given in J 08.00, the general information concerned with the methodology is typically standardised and therefore not especially burdensome for institutions to report once the supporting information and the software solutions are in place. The qualitative information to changes in the reported figures is an additional effort for all institutions, as the current risk management approach may not cover all of the required reporting information.
We suggest SNCIs should report only templates J 01.00, J 05.00 and J 08.00.
Implementing this new dimension in the reporting templates J 03.00 and J 06.00 would cause high additional cost, because the individual product structures must be transferred in this standardised view. Moreover, this transformation does not entail any valuable additional information, neither for supervisors nor for the banks’ internal interest rate risk management.
The implementation cost will occur independently of the option that will be chosen for visualisation in the report (duplication of templates, new dimension, duplication of rows or columns).
From a technical point of view, it is not possible (and not economically necessary) to calculate NII/EVE and MV changes only taking into account legal features (including automatic options and legal caps/floors) and disregarding effects of behavioural and/or conditional modelling (excluding effects from termination rights, prepayments, and early redemptions).
To do this, new scenario sets/calculation runs must be parameterised, executed and analysed on a regular basis. This will lead to significant additional process-related effort merely to fulfil reporting requirements. Furthermore, the separation of optional/behavioural components from calculated NII and interest rate risk in existing reporting views/structures will cause additional technical effort.
For some business models (e. g. German Bausparkassen), there are no legal cash flows in the traditional sense at all. Cash flows can only be simulated with assumptions about customer behaviour, because the basis of the business model is the multi-optionality of the contract. Calculation and separate reporting of legal cash flows is therefore not possible or makes no sense for these business models. Hence, the law governing German Bausparkassen (in §8) requires these institutions to implement a simulation model to forecast the cash flows resulting from both Bauspar deposits and Bauspar loans.
The carrying amount that is reported in the balance sheet after depreciation charges and accrued interest is already calculated in the integrated P&L simulation.
The exposure value (as defined in Article 111 of the CRR) is not available as result of any NII/EVE simulation. The implementation of additional credit risk adjustments will cause technical implementation effort. The credit risk exposure amount does not convey any valuable additional information for the bank’s interest rate risk management and would only be used for reporting requirements. We suggest not requiring any information based on the exposure value.
The reporting of nominal amounts should be considered as being less burdensome.
Question 1: Are the instructions and templates clear to the respondents? More specifically, do respondents consider that all definitions are unambiguous and accurate (e.g. linear and non-linear derivatives, contingent assets and liabilities, total assets/liabilities with impact on MV, etc)?
In principle, the definitions and instructions under Part 1 (general instructions) of the annex and the specific parts concerning the reporting templates are clear and understandable. Examples for the different product clusters are explicitly mentioned (for example linear derivatives -> futures, forwards, swaps).But questions remain regarding specific aspects of NII/EVE simulation. For example, there is no clear definition as to whether revenues from investment fund (CIU) positions must be broken down and reported separately in debt securities and derivatives, or if the interest-related components should be reported as a whole in “other”.
Furthermore, the question arises as to how the statutory termination option could be mapped in the case of a 10-year fixed interest rate. Additionally, the mapping of loan commitments is not clear, e. g. the split between short and long positions.
Question 2: Do the respondents identify any discrepancies between these templates and instructions and the calculation of the requirements set out in the underlying regulation?
From our point of view, the content of the templates by far exceeds the calculation requirements contained in the underlying regulatory regime for IRRBB. The templates contain position breakdown requirements unrelated the IRRBB Guidelines, e. g. breakdown of derivatives by collateralisation, a differentiation between behavioural and contractual cash flows as well as stating carrying amounts and fair values. Such information should be out of scope of the ITS and hence the relevant rows removed from the templates. In general, a commitment to use a uniform classification of reporting positions / type of values for any IRRBB survey, reporting and stress testing would help to reduce additional, partly manual reconciliation efforts.Question 3: Do the respondents agree that the amended ITS fits the purpose of the underlying regulation?
Although essential parts of the reporting requirements defined in the ITS are indeed derived consistently from underlying regulation standards as described in the RTS and the implementation of the Guidelines, the scope of the templates by far exceeds their purpose (please also refer to our answer to question 2). Especially the breakdown structures developed in reporting templates (J 02.00, J 03.00, J 04.00) that must be applied by large institutions deviate from the STE and exceed the requirements of the RTS and the Guidelines to a significant extent. The granularity and the different segmentation compared with what is currently used in NII/EVE simulation will cause high implementation costs (see question 5).Question 4: How many full-time equivalent (FTE) employees does your institution expect to involve in the implementation for how many months in order to report in a compliant way? Please provide indications for specific templates and options relevant for your institution. Please also indicate whether the same implementation will be used by many reporting institutions such that costs are shared among them.
The German banking sector consists of a wide range of institutions in terms of e. g. size, business model and complexity. The proposed reporting requirements will be burdensome for all of them. Most of the reporting requirements go beyond the actual concepts for managing interest rate risk and will have to be implemented over time. A technical rollout is to be expected to take several years. See also answer to question 5.Question 5: What technical and procedural dependencies does the implementation of the ITS imply for your institution? How do they affect the time schedule of the implementation?
Implementation of the IRRBB reporting requirements is very ambitious – if at all possible – in relation to timeline and costs. Since the following aspects are generally not compatible with existing management mechanisms and systems architectures, they will prove particularly burdensome to implement and might even lead to unintended changes in IRRBB management (fundamental gaps):• the breakdown structure (J 02.00, J 03.00, J 04.00) differs from actual risk management implementation, which is based on individually defined balance sheet structures. Additional data must be (pre-)processed, and a new COREP segmentation view will have to be established. It is not clear whether all relevant data is available in the core banking and reporting systems.
• a detailed split of NII/EVE into contractual and optional components for all relevant products/contracts
• add-on behavioural modelling, time series approaches, automatic optionalities
• new split of derivatives into long/short, interest and currency positions (legs), and segmentation in the corresponding asset/liability structures
• implementation rules for hedge accounting (as required under treatment of derivatives and definition of NII)
These are only some particularly eye-catching examples. It is very likely that there are many more. Implementation requirements for each institution under the available software applications will lead to a very challenging – if at all possible – effort to map the current product structure, which is individually chosen by each institution, to fulfil the stated reporting structure requirements. Supporting information from central IT services and other product service providers will require an equally challenging effort to incorporate these individually chosen product structures.
Question 6: Do respondents agree that the decision to simplify reporting templates is the best approach in implementing proportionality? In case you do not agree, what other proposal would be more efficient to reduce costs?
Generally, each simplification of the reporting templates is a valuable effort to support the proportionality of these regulatory requirements. To support simplification of the requirements, the complexity of the required reporting should be better targeted to the current reporting schemes.The suggested reporting requirements include a level of detail that is not common among SNCIs and not used in managing interest rate risk. Therefore, even with the suggested simplification, the resulting reporting requirements are still a tremendous effort and burden for SNCIs, which run counter to efforts to promote proportionality (see EBA’s Cost of Compliance study).
Moreover, there should be a proportionate approach for the group of “other institutions” as well, in particular concerning the (granularity of) breakdowns.
A phase-in approach for all templates with breakdowns should also be considered. We also suggest additional simplifications for banks that do not significantly rely on liabilities with optional or variable features.
Is the expected frequency for templates J 05.00, J 06.00, J 07.00 and J 08.00 feasible and proportionate?
As already mentioned in our answers to questions 3 and 5, the requirements contain a level of detail that is currently not used by most SNCIs as well as “other institutions”. To improve proportionality, a less detailed scheme of assets in the reporting requirements is needed.Regarding the information given in J 08.00, the general information concerned with the methodology is typically standardised and therefore not especially burdensome for institutions to report once the supporting information and the software solutions are in place. The qualitative information to changes in the reported figures is an additional effort for all institutions, as the current risk management approach may not cover all of the required reporting information.
We suggest SNCIs should report only templates J 01.00, J 05.00 and J 08.00.
Question 8: Do respondents perceive that the reporting requirements are proportionate for institutions other than large institutions and small and non-complex institutions (‘other’ institutions)? Is there some quantitative information contained in Templates J 02.00, J 03.00 and J 04.00 that is overly burdensome? Is the expected frequency for templates J 02.00, J 03.00, J 04.00 and J 08.00 feasible and proportionate? How could proportionality be further improved for these institutions?
“Other institutions” should at most follow the reporting standards currently proposed for SNCIs but with downsized breakdowns, while requirements for SNCIs should be significantly reduced. In addition to templates J 01.00.and J 08.00, we suggest that other institutions should report templates J 05.00, J 06.00 and J 07.00 (but J 06.00 and J 07.00 with downsized breakdowns) and SNCIs should only report template J 05.00 (see question 12 for exposure value).Question 9: Do respondents agree that the number of currencies requested in this reporting package is proportionate? Particularly for templates J 02.00 to J 08.00, do these amended ITS request right amount of information for currencies that have a limited/marginal contribution to the IRRBB?
The given definition is in line with the currently used definitions for materiality for currencies with only a marginal contribution to interest rate risk and is therefore proportionate.Would respondents propose a different approach to reduce the reporting costs (e.g breakdown in rows by fixed/floating rate instrument, or instead of having it in a different dimension duplicate the columns of the panel to fit fixed and floating in different columns)? Please elaborate.
No, this is not the case and the implementation of IRRBB figures, such as those in templates J 03.00 and J 06.00, would result in substantial costs. The calculation/simulation of net interest income and interest rate risk is based on product structures defined at the individual bank level. The aggregation is based on contracts with similar properties. Within these structures, it might be possible to differentiate between fixed and floating-rate instruments. But it is not possible to do this systematically in a standardised way so that the result of this differentiation could be used directly in a common reporting framework.Implementing this new dimension in the reporting templates J 03.00 and J 06.00 would cause high additional cost, because the individual product structures must be transferred in this standardised view. Moreover, this transformation does not entail any valuable additional information, neither for supervisors nor for the banks’ internal interest rate risk management.
The implementation cost will occur independently of the option that will be chosen for visualisation in the report (duplication of templates, new dimension, duplication of rows or columns).
Question 11: Do respondents currently compute the figures in column 0020 for internal monitoring and/or supervisory reporting? If not, do respondents perceive that column 0020 adds considerable reporting costs in order to calculate these figures (please consider that it would only be reported for the aggregate of all currencies)? Would respondents propose a different approach to reduce the reporting costs? Please elaborate.
No, the figures in column 0020 are not monitored or reported at the moment.From a technical point of view, it is not possible (and not economically necessary) to calculate NII/EVE and MV changes only taking into account legal features (including automatic options and legal caps/floors) and disregarding effects of behavioural and/or conditional modelling (excluding effects from termination rights, prepayments, and early redemptions).
To do this, new scenario sets/calculation runs must be parameterised, executed and analysed on a regular basis. This will lead to significant additional process-related effort merely to fulfil reporting requirements. Furthermore, the separation of optional/behavioural components from calculated NII and interest rate risk in existing reporting views/structures will cause additional technical effort.
For some business models (e. g. German Bausparkassen), there are no legal cash flows in the traditional sense at all. Cash flows can only be simulated with assumptions about customer behaviour, because the basis of the business model is the multi-optionality of the contract. Calculation and separate reporting of legal cash flows is therefore not possible or makes no sense for these business models. Hence, the law governing German Bausparkassen (in §8) requires these institutions to implement a simulation model to forecast the cash flows resulting from both Bauspar deposits and Bauspar loans.
Question 12: Does the inclusion of carrying amount and credit risk exposure amount cause implementation challenges? If yes, please describe the challenges.
Firstly, we would like to highlight the fact that the carrying amount of total assets for the counterparties is already reported via FINREP. Thus, this represents an overlap which must be avoided (see EBA results on Cost of Compliance study; recommendation 8). Secondly, we do not understand why the exposure value is included at all. Thirdly, these templates ask for three calculations: the carrying amount, the exposure value and the accounting value (threshold purposes only). It is not comprehensible why institutions need to compute three different types of values for these templates. This request appears unnecessary.The carrying amount that is reported in the balance sheet after depreciation charges and accrued interest is already calculated in the integrated P&L simulation.
The exposure value (as defined in Article 111 of the CRR) is not available as result of any NII/EVE simulation. The implementation of additional credit risk adjustments will cause technical implementation effort. The credit risk exposure amount does not convey any valuable additional information for the bank’s interest rate risk management and would only be used for reporting requirements. We suggest not requiring any information based on the exposure value.
The reporting of nominal amounts should be considered as being less burdensome.