When calculating the aggregate EVE change for each interest rate shock scenario, should EVE gains of the domestic currency (i.e. EUR in most cases) be weighted by a factor of 50% or should such gains be weighted by a factor of 100%?
Institutions have to aggregate the EVE change for each interest rate shock scenario and translate it into domestic currency.
When doing so “institutions should add together any negative and positive changes to EVE occurring in each currency. Positive changes should be weighted by a factor of 50%” (paragraph 115(m) of the EBA/GL/2018/02 (Guidelines on the management of interest rate risk arising from non-trading book activities).
The treatment of domestic currency positions is not specified and the text is open to two interpretations:
1. Positive changes of currencies other than EUR should be weighted by a factor of 50%;
2. All positive changes should always be weighted by a factor of 50%.
A third possible interpretation would be that all positive changes should only be weighted by a factor of 50%, when EVE changes from other currencies are considered, i.e. if material currency positions other than the domestic currency exist. However, we conclude this cannot be the aim of the paragraph due to the different treatment of EVE gains resulting from the existence of currency positions with material IRRBB. That is, a bank without material foreign currency positions would profit more from a positive interest rate shock than a bank with those material foreign currency positions.
We have exemplified in the table below the effects of the two interpretations: Depending on the share of foreign currency positions and the respective exposures, the reported value of the standardised outlier test and even the relevant scenario may differ. To see this, change the share of USD in cell C3. It shows that there may be circumstances under which the interpretation of 115(m) may become relevant. Currently, the interpretation of this para seems to differ across (N)CAs.
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Interpretation |
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Share of USD |
50% |
1 |
2 |
|
|
bank is exposed to an increase of EUR rates |
EUR ΔEVE in EUR |
Parallel up |
-200 |
-200 |
|
|
Parallel down |
100 |
100 |
|
|
|
|
|||
|
bank is exposed to a decrease of USD rates |
USD ΔEVE in EUR |
Parallel up |
100 |
100 |
|
|
Parallel down |
-200 |
-200 |
|
|
|
|
|||
|
|
Aggregated ΔEVE |
Parallel up |
-75 |
-75 |
|
|
|
Parallel down |
-50 |
-75 |
Interpretations:
1. Positive changes of currencies other than EUR should be weighted by a factor of 50%.
2. All positive changes should always be weighted by a factor of 50%.
* Parity of EUR and USD is assumed
Following paragraph 115 (m) of the EBA/GL/2018/02 (Guidelines on the management of interest rate risk arising from non-trading book activities), when calculating the aggregate Economic Value of Equity (EVE) change for each interest rate shock scenario, institutions should add together any negative and positive changes to EVE occurring in each material currency. Positive changes should be weighted by a factor of 50%.
The GL do not set any exception here and a 50% factor should apply to all positive changes irrespective of whether or not it is referring to items denominated in the reporting currency or if all positions are denominated in only one currency. Before proceeding to computing the aggregate EVE change for each interest rate shock scenario, changes in the EVE for each interest rate shock scenario for material currencies other than the reporting currency should be converted to the reporting currency at the prevailing spot FX rate on the reference date.