Response to consultation on Guidelines on technical aspects of the management of interest rate risk

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Question 2: Are the guidelines in section 4.1. regarding the general provisions sufficiently clear? If not, please provide concrete suggestions.

We agree that cash flows should be calculated net of provisions not only for the NPEs but for the whole loan book (e.g. for performing loans with collective provision). Cash flows need to be aligned with the accounting recognition of interest income and balance sheet value. It is thus required to clarify in the Consultation Paper that future interest income is calculated following IFRS9 principles. We consider this an appropriate treatment since what matters under the different scenarios is to produce results that will best resemble how the Banks’ P&L and Balance sheet are affected.

Question 7: Are the guidelines in section 4.4. regarding the measurement sufficiently clear? If not, please provide concrete suggestions and justify your answer.

It is not clear why the six Basel scenarios are considered as part of the ongoing management scenarios. They are stressed enough and should thus be considered in our opinion part of the stress scenarios. Otherwise, it is unclear what the stress scenarios should be and at which magnitude. If you believe that his should be the case you need to provide more detail guidance as to what you expect the stress scenarios to be.

Question 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.

Given the difficulty of isolating accurately the commercial margins from the overall interest rate (e.g. for fixed rate items of the balance sheet) we believe that it is more appropriate to include the margin component both when calculating the cash flows (numerator) and when discounting (include commercial margins to the risk free rate). Otherwise there will be inconsistency in the treatment of the credit risk of an item between the numerator and the denominator.

Question 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.

Our internal systems are semi flexible in excluding margins. At the setup of the system the total interest rate of all items has been considered as the relevant measure for calculating future cash flows. If this was to change, additional support would be needed from the Vendor as well as additional man hours from the Bank’s resources. As a result we consider the cost as medium. In addition to the above, conceptual issues will be faced for fixed rate items of the BS whose commercial margin is not observable.

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.

This floor assumption is not considered appropriate given that it not supported by any market practice and is difficult to support/substantiate. It is suggested that the magnitude of each shock is not constraint by any floor assumption affecting both cash flows and discount factors. Moreover, the change in floor over time (by 5bps) is complicated to implement and fully automate in a system. It is suggested that we use floors only for cashflows either where a contractual agreement is in place (e.g. loans with floor of 0%) or where a strategic plan/decision of the Bank is in place (e.g. no negative rates for deposits).

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.

Yes it is considered sufficient to measure IRRBB in terms of EVE as well as NII purposes, given that the contribution to the EVE/NII of the small currencies is very small and does not justify the effort/time required to produce results. It needs to be clarified whether this threshold is applicable for NII purposes.

Question 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?

Currently, disregarding the positive changes of EVE does not have a material impact on the supervisory test. However, we disagree conceptually on adopting this methodology since it only penalises a Bank without any theoretical grounds. In additions this treatment is not supported by our systems. It needs to be clarified whether this treatment is applicable for NII purposes.

Name of organisation

Bank of Cyprus