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Response to consultation on Guidelines on technical aspects of the management of interest rate risk
Go backQuestion 1: Are the definitions sufficiently clear? If not, please provide concrete suggestions and justify your answer.
NAQuestion 2: Are the guidelines in section 4.1. regarding the general provisions sufficiently clear? If not, please provide concrete suggestions.
The general provisions in Section 4.1 are clear, but deficient in one respect : paragraph 20 should be explicitly qualified by reference to the size and complexity of the institution, as well as its existing / prospective exposure to IRRBB. Not all the elements are really necessary for small, simple banks. We suspect that paragraphs 16 (NPLs) and 18 (CSRBB) are examples of elements that could be disapplied for small banks. (Moreover, we understand there may be some discrepancy in the definition of CSRBB between the Guidelines and the BCBS Standards.)Question 3: Do you agree that cash flows from non-performing exposures (NPEs) should be net of provisions and treated as general interest rate sensitive instruments whose modelling should reflect expected cash flows and their timing for the purpose of EV and earnings measures? If not, please provide concrete suggestions and justify your answer.
NAQuestion 4: Are the guidelines in section 4.2. regarding the capital identification, calculation, and allocation sufficiently clear? If not, please provide concrete suggestions and justify your answer.
Section 4.2 on capital identification is sufficiently clear, but again lacks any explicit recognition of the need for proportionality. The requirements in section 4.2 should therefore be qualified by reference to the size and complexity of the institution – probably best located in paragraph 25.Question 5: Do you agree with the list of elements to be considered for the internal capital allocation in respect of IRRBB to earnings in paragraph 30? If not, please provide concrete suggestions and justify your answer.
NAQuestion 6: Are the guidelines in section 4.3. regarding the governance sufficiently clear? If not, please provide concrete suggestions and justify your answer.
Section 4.3 regarding governance is clear, and in several places already recognises the proportionality principle, but we think this needs to be more fully embedded throughout Section 4.3.Question 7: Are the guidelines in section 4.4. regarding the measurement sufficiently clear? If not, please provide concrete suggestions and justify your answer.
Section 4.4 on measurement is clear and comprehensive. There is already welcome recognition in several places of the principle of proportionality ( e.g. at paragraphs 87, 89 and 91 (a) ) but we think this should go further, especially in terms of numbers of scenarios. Fewer but relevant scenarios applied, and their results analysed and understood more thoroughly, may give a better result in terms of practical risk management than larger numbers of scenarios that will inevitably be used more superficially, as people fail to see the wood for the trees.Question 8: Do you consider the comparison between EV metrics calculated using contractual terms for NMDs with the EV metrics calculated with behavioural modelled assumptions sensible and practical? Please justify your answer.
NAQuestion 9: Are the guidelines in section 4.5. regarding the supervisory outlier test sufficiently clear? If not, please provide concrete suggestions and justify your answer.
NAQuestion 10: Is the proportionality adequately reflected in the guidelines, in particular in relation to the transitional period for SREP category 3 and 4 institutions and the frequency of calculation for the additional outlier test under paragraph 112?
No, section 4.5 does not adequately reflect the principle of proportionality. The gestures in that direction – extra six months for implementation and possibly reduced frequency – are wholly inadequate. While we support the principle of the “supervisory outlier” test as a consistent, comparable measure, as proposed it is too complex for small, simple banks. The over-complex items include any disaggregation of spreads, the inclusion of interest payment as well as principal cashflows, and the use of multiple interest rate floors across the yield curve. We also think NPLs and pension items could be dealt with more simply. The proposed treatments may be suitable for larger banks, but the cost-benefit equation for small, simple banks is adverse.Question 11: If relevant, do you manage interest rate risk arising from pension obligations and pension plans assets within the IRRBB framework or do you cover it within another risk category (e.g. within market risk separately from IRRBB, etc.)?
NAQuestion 12: Which treatment of commercial margins cash flows do you consider conceptually most correct in EV metric, when discounting with risk free rate curve: a) including commercial margins cash flows or b) excluding commercial margins cash flows? Please justify your answer.
NAQuestion 13: Are your internal systems flexible enough to exclude margins for the purpose of calculating EV measures for the supervisory outlier test? If not, what would be the cost to adapt your systems (high, medium, low)? Please elaborate your answer.
We doubt some of the systems in use by small, simple banks can necessarily disaggregate margins in doing the required calculations, nor do we think it reasonable to require expenditure on this. We suggest that this is an unnecessary refinement.Question 14: Do you consider the level of the proposed linear lower bound as described in paragraph 113 (k) appropriate? If not, please provide concrete suggestions and justify your answer.
The “lower bound” involves a multiple stepped floor that we fear will prove excessively problematic for many banks’ systems, but add little value. A single floor, set say at zero across all time buckets, would be sufficient.Question 15: Do you consider the minimum threshold for material currencies included into the supervisory outlier test (5% for individual currency and minimum 90% of the total non-trading book assets or liabilities) sufficient to measure IRRBB in term of EVE? If not, please provide concrete suggestions and justify your answer.
NAQuestion 16: When aggregating changes to EVE in the supervisory outlier test, does the disregarding of positive changes to EVE have a material impact on the calculation of the supervisory outlier test?
NAName of organisation
Building Societies Association