French Banking Federation

Scope of application: It should be clarified if the guidelines apply at solo or at consolidated level. The French Banking industry supports the application of those requirements only at the highest level of consolidation of credit institutions and investment firms, not subject to the capital derogations of Articles 7 and 10 of Capital Requirement (UE) n° 575/2013. At least, the new 15% threshold should apply to non-large and internationally active banks, only after an impact study, in order to inform both le co-legislator, competent authorities and the industry on the impact of the implementation of this new BCBS measure. Until now, the new threshold was not tested on the individual entity level, nor for smaller institutions.

Credit spread risk from non-trading book activities (CSRBB): The definition of the credit spread risk in the banking book (CSRBB) should wait for a clear mandate delegated by the CRR to the EBA. In our view, the CSRBB should be restricted to liquid assets for which a change in credit spread has a direct impact on capital ratios (if and only if, this risk is not yet part of the bank’s ICAAP or provisioning process). The definition of this structural risk proposed in the draft guideline is not clear enough. The definition of the Basel standard was a clearer picture (i.e. “A related risk that banks need to monitor and assess in their interest rate risk management framework. CSRBB refers to any kind of asset/liability spread risk of credit-risky instruments that is not explained by IRRBB and by the expected credit/jump to default risk.”). The definitions should be aligned with the definition of the draft SREP EBA Guideline (i.e. please see paragraph n°221).

Constant balance sheet: We suggest the following alternative definition: “A balance sheet in which the total balance sheet size and composition are maintained by assuming like-for-like duration of assets and liabilities as they run off.” This alternative would permit a consistent duration of assets and liabilities, aligned with a responsible management of the IRRBB. Furthermore, it could be useful to consider the way to manage a “constant balance sheet” for credit institution in resolution and facing a run-off and decreasing balance sheet.
Yes, the section 4.1 of the guidelines is sufficiently clear.
Yes, we agree. 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.
Paragraph n°26(c): The sensitivity to key or imperfect modelling assumptions should not depend on IRRBB guidelines. This paragraph should be removed. The sensitivity to imperfect modelling assumptions is a “business risk” instead of an “interest rate risk”.

Paragraph n°26 and paragraph n°30(b): The wording of paragraphs n°30(b) and n°26 should be symmetrical. A capital charge should only be required when the bank is exposed to a risk of loss instead of a variability risk.

Paragraph n°31: No capital requirement due to potential reduced earnings should be included in this guideline. The objective of the IRRBB Guideline is to prevent banks from losses and not from reduced earnings.
There are ambiguities in the internal capital requirement. Some statements explicitly relate to loss risk, while some other statements seem to refer to variability risk and to enterprise-wide stress tests (e.g. “reduction in dividend policy”, “maintain business operations”).

There is a mention that there should be considered “capital buffer” for “reduced earnings in stress scenarios”, which does not make sense. In our opinion, internal capital should relate to loss risk, whereas variability risk should be covered by supervisory stress tests.

The link between IRRBB and the “dividend policy” should be removed. This requirement does not make sense.
Paragraph n°33: The draft guideline prescribes that Risk Appetite Statement should take the form of “maximum acceptable short-term and long-term impact of fluctuating interest rates on both earnings and economic value”. This requirement is excessively prescriptive.
Besides, the prescription for credit institutions to “determine their risk appetite in relation to each of [the] sub-types of IRRBB” is neither relevant nor efficient. Indeed, the delineation between gap risk and the two others types of risks is not straightforward but mainly relies on expert judgment and arbitrary assumptions. This is clearly exemplified in the Annex I table which doesn’t present any risk metric specific to either basis risk or option risk. Distinguishing the risk appetite for each sub-type of IRRBB would make it unnecessarily difficult for executive committees and supervisory boards to assess and validate institutions’ risk appetite framework as RAFs would rely on too many technical assumptions. We ask for the deletion of this requirement.

Paragraph n°34: The draft guideline is overly biased toward banks whose management of non-trading interest rate risk consists in “riding the yield curve”. We remind that, for our members, such “riding the yield curve” is extremely limited and as such, it should not spoil the IRRBB regulatory framework.

Paragraph n°44(f): The instruments accounted for fair value, notably derivatives, are unduly stigmatized in the draft guideline. The consultative document requires considering them separately for defining risk appetite statement, and to define limits “to control mark-to-market risks in instruments that are accounted for at market value”. This is a fatal flaw of the draft guideline. We consider isolating instruments accounted at fair value does not make sense. Derivatives should not be stigmatized without reason as their risk is already measured under the Counterparty Credit risk framework.

Paragraph n°53(b): It should be clarified that there is no requirement to build up a transaction-level data system. This requirement is too restrictive for all banks and particularly for large and internationally active banks. Each institution should be free to consider how to manage data on a line by line basis or an aggregated basis.

Paragraph n°53(c) and paragraph 53(e): The combination of both paragraphs is confusing. Each and every institution should be free to consider its data on a line by line basis or on an aggregated basis.
Paragraph n°105(c): The requirement for “a margin of conservatism should be used where there are uncertainties” is not clear enough. The way to apply such a margin on behavioural assumptions is operationally impossible. We ask for the deletion of this expectation.

Paragraph n°106(a): The definition of “core” and “transient” balances on transaction accounts should be revised in order to offer more flexibility to credit institutions. Moreover, the current definition seems inconsistent with the definition of “stable/operational” and “less stable/non-operational” deposits applicable to liquidity requirements.
No, we consider that the comparison between EV metrics calculated using contractual terms for NMDs with the EV metrics calculated with behavioural modelled assumptions may be time-consuming (as they may not be calculated and analysed for each product on a regularly basis). More fundamentally, based on our experience, the analysis of some of them (such as this comparison applied to sight deposits) appears to be useless.
Paragraph n°113(o): The five years cap should only apply on “non-maturing deposits” and not on “non-repricing deposits”. The current wording is confusing.
Any less frequently reporting requirement for less important institution should depend on a level 1 mandate and be consistent with the global Pillar II requirement (SREP) to avoid any inconsistency in the management of Pillar II requirements and less consistency in the supervision by competent authorities.

Moreover, it should be considered that the complexity of the IRRBB measurement depend on the complexity of the balance sheet of a credit institution and not on the size of its balance sheet.
Pension obligations and pension plans assets do not depend on the management of the interest rate risk arising from the banking book but on the structural risk of institutions. They should be assessed under the risk appetite framework of institutions.
Commercial margins cash flows should be excluded from the EV metric, when discounting with risk free rate curve. The inclusion of commercial margin could bias the result of the metric depending on the high or low interest rate risk environment.

By nature, commercial margin are not a risk indicator. Operationally, commercial margin applicable to assets and liabilities vary, regarding the interest rate environment and the idiosyncratic spread risk of every credit institution.

This assumption is confirmed by the absence of a clear framework applicable for CSRBB.
Internal systems are enough flexible to exclude margins, but any evolution is costly. Until now, without clear management framework of commercial margin, every credit institution has developed an internal system. The cost will depend on every institution.

We ask for a clear decision and a longer adaptation period to comply with this new requirement. We refuse a double management framework calculating indicators both with and without commercial margins.
We consider the proposed “linear lower bound scenario” as described in paragraph 113(k) as burdensome for a Pillar II requirement due to the multiplication of shocks scenario in the draft guidelines. As a consequence, we suggest deleting the linear lower bound scenario.
The minimum threshold for material currencies included into the supervisory outlier test is consistent with internal practices.
More time should be given to institutions to evaluate if the positive changes to EVE have a material impact on the calculation of the supervisory outlier test. At least, the EBA should manage an impact study on this topic, give time and scenarios to institutions in order to evaluate the criticality of those impacts.
Pierre-Loic BENOIT