Response to consultation on draft RTS on IRRBB supervisory outlier tests
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The idea of adding change of market value of fair-value instruments to NII seems somewhat confusing.
1. Proposal doesn’t specify what kind of instruments should be considered, whether classified to P&L, FVOCI or HTC, derivatives classified to hedge accounting, own issues that are quoted on OTC market, assets held as liquidity buffers, whether accounted at fair value at level 1 or level 1 and 2 of IFRS FV hierarchy, etc. Each of these instruments has its specific purpose within IRRBB and ILAAP processes and should be considered in SOT NII according to its nature.
2. Art. 5 (b) doesn’t specify the way of including change of market value of FV instruments into SOT NII calculation. Such indefiniteness may be prone to various interpretations of institutions and lead to incomparability of results. It doesn’t seem desirable since breaching SOT threshold leads to reporting to supervisory and necessity of reducing risk exposure. As such regulations of that kind of matter should be clear and precise.
3. Calculating clear NII requires including all cash flows that mature or reprice within NII horizon. Consider 1Y NII and IRS rec fixed that matures in 13M and hedge flow of FR loans (IFRS Cash flow hedge, MtM in FVOCI). Including change of FV of that IRS would lead to double counting 12/13 of its impact (since cash flows of first 12M are already included in NII calculation), which seems incorrect. The impact would be even more misleading since that IRS is CFH FVOCI that hedges floating payments of loan portfolio. On the other hand calculating MtM change of that IRS excluding cash flows of first 12M would be operationally difficult to implement.
Due to above mentioned flaws we recommend clean NII as a basis of SOT NII.
Regarding NII threshold as reference to Tier1 or baseline NII:
∆NII that refers to baseline scenario seems to address in a more consistent manner the business model of individual institution. Different NII sensitivity seems acceptable for institution that has ie high NIM and CoR, low NIM and CoR, high provision income and low NIM or high NIM and low provision income. In order to fine-tune proposed metric not only AdmExpenses should be included but also CoR, provisions and other significant positions that build-up bottom line and capital base. Otherwise ∆NII/Tier1 should be considered.
Question 3: Do respondents consider that all the necessary aspects have been covered in the draft regulatory standard? Do respondents find the provisions clear enough or would any additional clarification be needed on any aspect?
Regarding question 2 and 3:The idea of adding change of market value of fair-value instruments to NII seems somewhat confusing.
1. Proposal doesn’t specify what kind of instruments should be considered, whether classified to P&L, FVOCI or HTC, derivatives classified to hedge accounting, own issues that are quoted on OTC market, assets held as liquidity buffers, whether accounted at fair value at level 1 or level 1 and 2 of IFRS FV hierarchy, etc. Each of these instruments has its specific purpose within IRRBB and ILAAP processes and should be considered in SOT NII according to its nature.
2. Art. 5 (b) doesn’t specify the way of including change of market value of FV instruments into SOT NII calculation. Such indefiniteness may be prone to various interpretations of institutions and lead to incomparability of results. It doesn’t seem desirable since breaching SOT threshold leads to reporting to supervisory and necessity of reducing risk exposure. As such regulations of that kind of matter should be clear and precise.
3. Calculating clear NII requires including all cash flows that mature or reprice within NII horizon. Consider 1Y NII and IRS rec fixed that matures in 13M and hedge flow of FR loans (IFRS Cash flow hedge, MtM in FVOCI). Including change of FV of that IRS would lead to double counting 12/13 of its impact (since cash flows of first 12M are already included in NII calculation), which seems incorrect. The impact would be even more misleading since that IRS is CFH FVOCI that hedges floating payments of loan portfolio. On the other hand calculating MtM change of that IRS excluding cash flows of first 12M would be operationally difficult to implement.
Due to above mentioned flaws we recommend clean NII as a basis of SOT NII.
Regarding NII threshold as reference to Tier1 or baseline NII:
∆NII that refers to baseline scenario seems to address in a more consistent manner the business model of individual institution. Different NII sensitivity seems acceptable for institution that has ie high NIM and CoR, low NIM and CoR, high provision income and low NIM or high NIM and low provision income. In order to fine-tune proposed metric not only AdmExpenses should be included but also CoR, provisions and other significant positions that build-up bottom line and capital base. Otherwise ∆NII/Tier1 should be considered.